The Evolving Future of Television

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The Evolving Future of Television

Most Baby Boomers can remember when television consisted of three big networks and a handful of local channels. TV was free, but it was also extremely limited in terms of content, choice, and convenience. Generation X grew up with an increasing number of channels as cable, satellite, and eventually telcos entered the market with pay-TV models. Today, the Millennials are coming of age just as TV is going through another upheaval as premium viewing migrates to the Internet. Let's examine where this medium is now, and where it is headed.

According to research by Needham Insights' Laura Martin, one of the world's leading entertainment and Internet analysts, the biggest players in the premium online video (POV) ecosystem are YouTube, Hulu, Netflix, AOL, and Yahoo. Combined, they will spend about $750 million to produce "Internet-first" TV series in 2013.1

That is just a fraction of the $45 billion that traditional network and cable channels will spend on programming in 2013. In fact, the increase in spending in the traditional TV ecosystem from 2012 to 2013 is $1.5 billion, which is twice the total spending for premium online video content in 2013.

Just as premium online video content lags far behind TV, so does the amount spent on advertising in that ecosystem. Television generates $77 billion in annual advertising revenue, while POV advertising reached a mere $4 billion in 2012.

However, as the POV market grows, it will threaten many incumbents, because the economics of today's TV ecosystem depend on bundling content. Bundling makes sense for current providers for several reasons:

  1. The relatively few hit shows subsidize all of the nonhits. Only 10 to 20 percent of TV producers' costs are tied to hit shows; the other 80 to 90 percent of costs are spent on programs that attract fewer viewers and make essentially no money. Yet, those shows with lower ratings give viewers more choices and a better viewing experience.
  2. Since the hit shows subsidize the nonhits, the content producers can stay in business even if they try new ideas that fail. Just as a diversified stock portfolio reduces risk, production companies can create a diverse portfolio of sitcoms, dramas, and reality shows, knowing that the profits from one or two ratings winners will offset all of the losers.
  3. Hit shows help viewers discover other shows. When a new show follows a top-rated show on the schedule, it often builds a following simply because, thanks to inertia, viewers find it easier to keep watching the same channel. That was the formula NBC followed for more than a decade with its "Must-See TV" block of programs on Thursday nights, including Friends, Seinfeld, and Frasier...

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