The Next Great Media War
Who will win the battle between content providers like Viacom and distributors like Time Warner Cable? Viewers, of course.
The New Year’s Eve drama between Time Warner Cable and Viacom was the opening salvo in what promises to be a long and brutal battle for the future of our major media companies. It’s media’s version of the Hatfields and McCoys: Content vs. Distribution. Who should make more money?
At stake is how content creators will be compensated and control over the relationship with the consumer of that content. How this plays out could have a major impact on which companies own the future of media.
Based on last week’s dramatic showdown, we’re seeing the beginning of the shift of power from the companies that deliver content (broadcast networks, cable systems, satellite systems, etc.) to the companies that create and own it.
Large media companies will be watching as customers change their consumption habits, advertising revenues drop, and creative talent goes in a hundred directions.
This is all your fault of course. You, the consumer, empowered by all kinds of new technologies–from iPods and iPhones to Hulu and Slingbox–have begun to expect that you can view video programming whenever, wherever, and however you want to. And naturally, you want to be the judge of what content is good and how much you’re willing to pay for it.
This is what the Internet does. It eliminates middlemen. If you live in California and you want to buy a sweater from a boutique in New York, you go their website and buy it. Forget having to find the one store in your state that might carry that sweater, or poring over catalogues hoping to find it. Those days are gone. And at some point, many of those businesses in the middle may be gone, too.
That’s what is beginning to happen to content—the middleman is disappearing. But the fact that all video will be available on the Internet doesn’t mean everyone will see everything. In fact, it could mean that it will be even harder for programming to distinguish itself or even get the chance to be seen by large audiences. There just isn’t enough time for you to check out everything on the web, meaning companies that know how to package and market video content for you will still exist. And it will still be more efficient to deliver some programming, like live sports and mass market programming, down one-way delivery systems like cable and satellite. So networks and cable systems will exist and control some of what we see.
But as the business models for the new digital platforms – Internet, satellite, telephone--evolve, they will create opportunities for new forms of advertising or methods for consumers to pay directly for content (iTunes, etc.). In the end, the power of the good content providers should continue to grow in this equation.
That’s a huge change. Historically, the distribution platforms have played the dominant role in controlling what programming you would see on your TV. First the broadcast networks dominated because so few were licensed. Then the cable systems grew in power because once you became a cable customer, then everything you viewed on your TV came through that pipeline.
But if that cable system didn’t want to carry your programming, they didn’t have to. As they grew and picked up significant percentages of the viewers in a particular market, their leverage with the programmers grew. What cable and satellite systems carry isn’t only based on audience acceptance. It’s about their business. If one content player demanded more money from the cable company than another, it didn’t always get to you. Try to find the NFL Network on your cable system.
Still, we assume that most systems wanted to keep their price as attractive as possible so they aren’t thrilled with anything that raises the price to their consumers, especially if they don’t get that extra money.
With the advent of first satellite TV and now the Internet, the power is beginning to shift. Suddenly the cable system isn’t the only way you can get robust digital programming into your home. You can install a satellite dish from one of two major players – DirecTV and the Dish Network – and they will bring you hundreds of channels. And, in a growing number of markets you can get a competitive digital television service from your phone company – particularly Verizon and AT&T.
Of course, now much of today’s programming is also showing up online, where it can be viewed in several places by someone with no TV hookup at all. There are a growing number of people pulling the plug on either satellite or cable and getting all their TV programming from the web.
That brings us to last week’s face off.
Viacom threatened to pull its 19 cable TV networks—including Nickelodeon, Comedy Central, and MTV—off Time Warner Cable systems, serving 13.3 million people around the country, at midnight on New Year’s Eve if Time Warner didn’t agree to increase its payments to Viacom by between 22 percent and 36 percent per channel according Marketwatch.com.
Viacom is king of the content side, with roughly 25 percent of all cable viewers watching their networks during the day. On the other hand, ratings of the Viacom channels on Time Warner Cable are down—fewer people are watching those (and many other) channels than last year. So if the content you are producing is less relevant, why should you get more?
Meanwhile, Time Warner Cable’s parent company, Time Warner, is the second largest provider of content, with 16 percent of all viewing on cable on their various networks (CNN, HBO etc). So it’s on both sides of this issue, and on the programming side it’s Viacom’s major competitor.
Viacom already received about $300 million from Time Warner Cable, according to BernsteinResearch, but that’s only about 2.8 percent of TWC’s overall video revenue. And since they are providing a quarter of what is actually being viewed on that cable system, Viacom wanted a bigger slice.
Truth be told, Viacom had a lot less to lose than in the past because it now has new ways to get its programming to its audience via the Internet, satellite and through the phone companies.
So it wasn’t a surprise when the details of the deal started to trickle out. According to nytimes.com: “An executive with knowledge of the negotiation said that Time Warner had given in and agreed to pay a higher fee to MTV Networks.”
And according to the Wall Street Journal’s reporting, the major concession Time Warner Cable got from the new deal related entirely to its attempt to tap into the new digital revenue streams. It will be allowed to put some Viacom programs up earlier on TWC’s own video-on-demand service.
But both are merely incremental moves on the seismic shift that is violently shaking up the media world today. The changes coming are so dramatic and widespread they will be hard to keep up with, both for businesses and consumers.
Just as you will struggle over which new devices to buy and use—iPhone or BlackBerry Storm?—media companies will struggle with how to create and pay for content in a world changing so quickly that no one knows how to get it paid for.
At the same time the large media companies will be watching as customers change their consumption habits, advertising revenues drop, and creative talent goes in a hundred directions.
If this was football, it would be like changing the field, the ball, the number of players and the rules at the same time. Maybe we could even throw in a BCS Playoff system to decide who wins.
Larry Kramer is senior adviser at Polaris Venture Partners, a national venture capital firm. He served as the first president of CBS Digital Media. Prior to joining CBS, Kramer was chairman, CEO, and founder of MarketWatch, Inc. Kramer spent more than 20 years in journalism as a reporter and editor at The San Francisco Examiner, The Washington Post, and The Times of Trenton.