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TV vs. the Internet: Who Will Win?

By: NYBooks.com

Between 1999 and 2009, annual revenues in the music industry declined from $14.6 billion to $6.3 billion, according to the market analysis firm Forrester Research. The music business was first attacked from below by illegal file sharing on Napster and subsequently from above by Apple’s iTunes, which unbundled fourteen-dollar CDs into ninety-nine-cent songs. Even as user habits have shifted again, away from owning digital audio files such as MP3s and toward renting music from streaming services like Spotify and Pandora, recording industry revenues have remained flat, below the level where they were in the 1970s.

Newspapers followed a similar pattern, sustaining a much greater destruction of value in a shorter period of time. From 2006 to 2012, revenues fell from $49.3 billion to $22.3 billion, according to trade association figures. The challengers from below included Craigslist, which turned the multibillion-dollar print classified business into a multimillion-dollar online business. Google diverted other advertising dollars while online news sapped print circulation.

These disruptions left the question of when the television business would face its turn on the dissecting table. But despite sharing the vulnerabilities of other long-standing media—shrinking audiences, changing consumption patterns, new competition for ad dollars—the television dinosaur has only grown fatter. According to the research firm SNL Kagan, cable TV revenues rose from $36 billion in 2000 to $93 billion in 2010. Profits of the giant conglomerates—ABC/Disney, NBC Universal, Fox, Viacom, and CBS—have continued to climb in the years since. Cable operators thrive despite antiquated technology, extreme customer dissatisfaction, and the challenge of Internet streaming services like Netflix and Amazon, which now create their own original content as well. Even local broadcast stations remain highly profitable despite the declining audiences for their core news product, thanks in part to a surge of political spending following the Citizens United decision in 2010.

How the television business has eluded the bitter fate of other media is the subject of Michael Wolff’s new book, Television Is the New Television. “For sixty years, television, given massive generational, behavioral, and technological shifts, has managed to change…not so much,” he writes. To Wolff, the industry’s imperviousness to digital disruption counts as nothing short of heroic. In an assemblage of digressive riffs, he praises television’s stodginess in defense of profits. This stands in contrast to newspapers and magazines, which he derides for embracing digital transformation in ways that have only accelerated their decline. For example, he criticizes The New York Times for relinquishing its attachment to a print edition that still provides nearly 80 percent of its revenue in favor of the much smaller, “profitless space” online.

Wolff contends that television learned a useful lesson from the gutting of the music industry. The record companies were at first lackadaisical in protecting their intellectual property, then went after their own customers, filing lawsuits against dorm-room downloaders. Under the Digital Millennium Copyright Act, passed in 1998, sites hosting videos such as YouTube appeared to be within their rights to wait for takedown notices before removing pirated material. But Viacom, led by the octogenarian Sumner Redstone, sued YouTube anyway. Its 2007 lawsuit forced Google, which had bought YouTube the previous year, to abandon copyright infringement as a business model. Thanks to the challenge from Viacom, YouTube became a venue for low-value content generated by users (“Charlie Bit My Finger”) and acceded to paying media owners, such as Comedy Central, a share of its advertising revenue in exchange for its use of material. “Instead of a common carrier they had become, in a major transformation, licensors,” Wolff writes. Where it might have been subsumed by a new distribution model, the television business instead subsumed its disruptor.

Wolff is dismissive of newer threats to the business. He regards cord cutting—customers dropping premium cable bundles in favor of Internet services such as Netflix—as an insignificant phenomenon. But even if it gathers steam, as recent evidence suggests may be happening, cord cutting leaves Comcast and Time Warner Cable, the largest cable companies, in a win-win position, since they provide the fiber optic cables that deliver broadband Internet to the home as well as those that bring TV. Even if you decide not to pay for hundreds of channels you don’t watch, you’ll pay the same monopoly to stream House of Cards. (This won’t provide much comfort, however, to companies that own the shows, which stand to lose revenue from both cable subscribers and commercials priced according to ratings.)

For Wolff, the resilience of the TV business finds its embodiment in Les Moonves, whom he describes as the “self-satisfied, overpaid” CEO of CBS, “with his singular passion and talent for old-fashioned American television.” In 2005, Viacom spun off its less desirable assets, including CBS and its storied news division, and handed them to Moonves to deal with. A decade later, CBS is worth more than the rest of Viacom combined, including MTV, VH1, and Nickelodeon. Moonves accomplished this through skillful negotiations with the cable operators, whom he realized couldn’t very well offer their customers channel packages that didn’t include CBS local stations. In 2013, Moonves demanded dramatically larger retransmission fees from Time Warner Cable and made his stations unavailable to Time Warner when he didn’t get them. After a month without CBS, TWC capitulated.

Thanks to these “retrans” fees, you pay eight dollars a month for ESPN whether you watch sports or not. It’s not the cable operators who are denying consumers the à la carte option many would prefer. It’s the big five television companies who refuse to parcel out their offerings—(1) ABC/Disney, which owns ESPN, A&E, and Lifetime; (2) NBC Universal, which owns USA, Bravo, and the Weather Channel; (3) Fox, which owns Fox Sports, F/X, and National Geographic; (4) Viacom, which owns Comedy Central, BET, and MTV; and (5) CBS, which owns Showtime, the Movie Channel, and the CW. For these companies, the indirect charges they receive for their content have become the pot of gold at the end of the advertising rainbow.

The positive aspect to this consumer-unfriendly economic model may be better television. Most commercials are directed at young people, based on the advertising industry’s belief in establishing brand loyalty early. That’s why so much ad-supported programming caters to the tastes of teenagers. Adults, however, pay cable bills, and this fosters the kind of long-arc narratives and complicated antiheroes that appeal to more mature audiences. Wolff argues that the economics of pay TV have driven the emergence of “storytelling on a riveting, epic, how-we-live-now scale: the baby boom trying to understand itself and the world it had wrought.”

There is indeed some wonderful stuff on TV these days, but prestige programs like Mad Men and Breaking Bad may owe more to obscure cable channels trying to distinguish themselves in a vast marketplace than to the third-party payer system embedded in the mumbo-jumbo of cable bills. The independent cable channel AMC continues to depend on advertising, and its competitors like Bravo, A&E, History, and Lifetime make their money from the advertising revenue of prime-time lineups of tawdry reality shows. Wolff idealizes the new television in a way that suggests he hasn’t spent much time watching Duck Dynasty. He doesn’t appear to be all that interested in what’s actually on TV. His broad embrace of it serves a different purpose: as a cudgel to attack the digital media that have been getting much attention. Wolff devotes a lot of his book to smacking the latest generation of digital media companies: BuzzFeed (a “staff of engineers able to game the social media world”); the Forbes website (“a shell game, in which, through a series of ever-developing stratagems, random eyeballs…were tricked or promoted into coming to the site”); and Vice (“so bizarre is the notion that Vice’s young male audience will watch international news that puzzled media minds can only seem to conclude it must be true”).

To Wolff, good old-fashioned television delivers something that these social optimizers, clickbaiters, and video clip-jobbers can’t, which is to keep audiences immersed in stories with a beginning, middle, and end. The economic reason for this, he asserts, is digital overabundance. On the Web, any given page can be seen many times so there are countless opportunities to advertise. This inexorably drives CPMs—cost per thousand page views, the unit by which advertising prices are typically measured—below the level that can support the creation of high-quality content in any form.

Some of Wolff’s judgments about digital trends hit their mark. But his analysis is too categorical and in places simply wrong. As younger audiences shift from television to digital consumption of media, advertising dollars are following them. Prices for desirable ad placements on the Web remain high, even as the value of generic traffic on most websites goes down. In the end, Wolff’s hostility toward digital media leads him to overstate both TV’s immunity to disruption and his case that, because of the law of supply and demand, nothing of value can ever become a real business online.

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