Rambles & Rants: Who Rules Video?

For years we've heard "content is king" at pretty much every conference related to the pay-TV business. One reason was that pay-TV is built on a degree of antagonism between cable networks and pay-TV providers, as they negotiate carriage agreements. So both parties constantly try to convince everyone that what they offer is more valuable than the other party.

Therefore, not everyone agreed the value in the business came from the content itself. Especially when cable penetration was growing steadily, operators would argue "distribution" was king. Or that content and distribution were both equally important -- and on at least one occasion, if content was "king," then distribution was "queen."

Owners of content often pointed out that viewers weren't tuning in to a pay-TV provider, but rather to particular shows that they liked, and that's what was driving the whole business. For example, people would queue up in front of movie theaters for the release of Star Wars for days, but you wouldn't see the same enthusiasm for their cable operator.

And yet, in spite of the poor customer service, annual rate increases and often miserable installation experiences, households around the US continued to sign up for cable. Operators argued there must be some value in their service, while cable networks argued it was only because there was no other way for consumers to get their content.

And then there was: The Internet became a viable medium for video distribution about ten years ago, and we've seen new OTT services develop, completely sidelining pay-TV providers. Based on OTTs' success, the content-is-king argument has become more compelling.

Or has it? The last three conferences I have been to, I've repeatedly heard "platform is king" on almost every panel. That it's not about the content, but the "platform," which could be anything from an iPhone to Facebook , depending on the context.

So which industry segment really holds the power in the world of digital video? It's as if the alien from the comic strip arrived on planet pay-tv and said "Take me to your leader," only to find no one can figure out who that is.

That's largely because there never was a clearly defined "king" in this business. Even in the good old days, the more valuable cable networks -- properties such as ESPN -- were able to command 20% annual carriage fee increases and bundle additional channels into the agreement because they were important drivers of pay-TV subscription. But less recognized channels were in no position to dictate anything -- they were the ones chasing operators for carriage so they could at least reach somebody.

As such, you could argue that companies like Walt Disney Co. (NYSE: DIS) (Owner of ESPN) and Viacom Inc. (NYSE: VIA) were "king," while smaller, niche networks were definitely not. So only certain types of content wrapped in well-recognized brands were "king."

But even for the major networks and media conglomerates, the larger operators such as Comcast Corp. (Nasdaq: CMCSA, CMCSK) and DirecTV had their own negotiating strengths. The reality was that being dropped by either of these operators would have lost the network access to 20 million-plus homes, and that would hit their advertising revenue hard. You could say they were more like elected officials with a marginal majority, than kings.

The key then is to look at what resulted from these negotiations. While things didn't always go their way, the larger media companies were more often than not able to push through carriage of multiple channel packages (bundled with the one channel everyone really wanted), which were priced consistently higher every year.

The operator, of course, passed the higher costs on to the consumer, which is why cable rates rose consistently through the previous decade. (Operators will point out here that they also needed to pay for billions in network upgrades, which allowed them to offer faster broadband and more channels.)

But recent years have certainly changed that picture. Cable network heavyweight Viacom is now restructuring its cable business in response to skinny bundles, by focusing on six channels rather than the 25 it had been previously hawking. ESPN is now reworking its market strategy to focus more on its OTT service, after falling from 100 million plus households in 2011, to 88 million today.

That's because the Internet has affected viewership in multiple ways. Firstly, it's allowed easier access to pirated content. Rapid, easy, non-lossy distribution is a major threat to the traditional pay-TV value chain. Secondly, it's created new forms and genres of video. Consumers, especially younger consumers, are more interested in short video clips and user-generated entertainment. This may make up a smaller percentage of total viewing, but it's still taking away from time spent watching a TV channel. This kind of video has also become intertwined with their social network interaction as well, and is better suited to the typical multitasking behavior typical of millennials.

Lastly, the Internet has enabled new OTT services, which have now started to develop their own content and syndicate popular shows. General interest cable networks themselves have mostly had relatively weak brand equity -- consumer loyalty was always more to the show rather than the network. When Netflix is spending $6 billion a year on creating new TV shows, paying for 25 Viacom channels that mostly offer second-run content doesn't seem very compelling.

And while no one is queuing up for cable subscriptions, look at the lines outside an Apple Inc. (Nasdaq: AAPL) store the day a new phone is released -- that "platform" is definitely king.

The problem for pay-TV providers is that even if "platform" is the new, post-Internet "distribution," they don't own it. At least, not the platforms people are queuing up for.

I would also question if the platform really is the new distribution? Usually, when people say platform is king now, it's about tailoring content to suit the platform (and related usage behavior.) For example, this could mean that using Facebook to stream 90-minute movies isn't really practical, as the user experience/user behavior on that platform is not suited to that kind of content. Similarly, sports content on social networks could perform well popular, but highlights and short clips may be better than streaming the entire game, as you would on TV.

As such, recognizing the importance of the platform is more about optimizing the user experience than conceding power. That's very different from the content vs. distribution debates we've had in the past.

Unfortunately, I think the open Internet has more or less wiped out the value a distributor had, so whatever else it may have been, distribution is not king anymore. But I do think operators continue to have value in another area, and that is aggregation.

Consumers signed up for pay-TV because it offers a wide range of content for a single, convenient, monthly fee. Today, this model has been shaken up because there are a number of OTT providers offering smaller chunks of the same experience, at a price that represents more value for money.

But the key differentiator for OTT providers is exclusive programming, and consumers who want to access all the best shows can only do so by painstakingly pulling together an extremely expensive collection of disparate subscriptions. Sooner or later, this is going to result in a thinning of the OTT herd, and consumers will look for a single provider that can offer them a large selection of different types of content. This selection must have different genres of content to suit different viewing behaviors and be priced competitively. It must also be available on multiple devices, offer both live and on-demand options, be tailored to the consumers themselves and to the platform they are consuming it on. It must have an outstanding user interface and all the social bells and whistles that are required.

If pay-TV operators can own that, they really will be the future kings of the video world.

— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation