Stealing Share

Browse all Articles

Change is afoot for the cable and satellite TV companies. Are they the next to fall victim to the Blockbuster Syndrome? That is, will they continue to hold onto a business model that is fast running out because their traditional revenue model does not allow for change?

It was reported recently that 800,000 US households have switched from cable or satellite TV to either rabbit ears or Internet sources for their entertainment and news.

This is not a huge number in the general scope of things. But it will be. I guarantee it. Change is coming and it will be here faster than you can say, “Blockbuster”.

Markets, financial markets aside, always seek economies. They naturally trend towards efficiencies. The efficiencies in cable and satellite have changed permanently. Let me explain.

It's Not The 70's Anymore

Back in the 70s, television for most Americans consisted of 5-10 channels: Three major broadcast networks (four, if you include PBS), and a few local UHF channels. The market clamored for more choices and better reception quality.

The problem for consumers then was few choices and poor reception quality. As in any industry, when a problem emerges it gives rise to innovation. Enter the local cable provider.

This idea that all human invention and progress arises from solving the correct problem is a universal axiom in business. It is a realization of identifying needs based on efficiencies and responding to those efficiencies with new economies. As a result of this universal model, a new business emerged: Cable TV.

Every new solution creates more problems and, when those problems are addressed, a new economy evolves. The early cable days are a prime example of this phenomenon. The original cable boxes had 26 channels. The four main networks, PBS, Channel 9 out of Chicago, 17 out of Atlanta, and a smattering of new arrivals such as ESPN, USA, and of course premium stations like HBO that played movies.

Customers Demanded Choice

The problem was that the customer wanted more choice. In response, they were added in the 90s with the promise of 500-plus channels providing your connection to all sorts of diversity from Playboy to Cartoon Network and everything else in between. As a result, the cable companies and satellite providers became the ultimate middleman. They were the gatekeepers to content and they charged end users (and content providers) accordingly.

Today, the problem is the paradox of choice. We have many choices, make few and pay for all the rest. If you watch just five channels with any regularity, as I do, resentment builds over the triple-digit cable bill every month. Many want to make choices independently of the offered subscription and then pay for those custom choices, which is why there is a movement to take charge by going to the Internet. Of course, such reduced revenue for the major providers would make it difficult to pay for their infrastructures. So they hold onto the model that they have.

Soon, they will have no business at all. They will go the way of the Neanderthal, a perfectly good adaptation of the homo sapiens that died out because they could not adapt to changes.

Because of compression technologies, we can now stream high-resolution video directly to our TV sets and computers. That is why Netflix is thriving and Blockbuster, which had the content and resources to change but refused to adapt, is vanishing. You can watch movies from Netflix and TV from Hulu instantly, or even download them from iTunes. (Which is why the brand promise of Time Warner Cable, “The Power of You,” can no longer be fulfilled.)

Last month, I watched the NCAA tournament games on an HD TV streamed directly from the CBS website. It’s an example that content providers are realizing that they no longer need the middleman (cable and satellite). The game will eventually be up. The content providers can offer their content directly from the Internet and pay for consumer viewing through traditional advertising. It is here now, and it will be growing.

What To Do?

What should the cable and satellite providers do? Embrace the change before the change grabs them in a deadly embrace. Become the portal by which all the content is neatly organized and accessible.

Will they lose $100-plus subscription fees? You bet they will, but the first one to grab the upcoming change will make up for the loss in current revenue through increased penetration and market share. They will become a global provider whose revenues are based on usage. And usage will depend on ease of use, simplicity and a willingness to address new problems as they arise.

Netflix is in an advantageous position to own this, as the content they provide can be accessible directly from the movie studios. Of course, its brand name identifies them with their technology. It needs to launch a new brand to do it right. YouTube? Possibly, but its user interface is clumsy and the navigation requires involvement.

Who will grab the change and turn it into opportunity? I would not bet on the current crop of cable or satellite providers. They would need to have a visionary at the lead. One who was willing to bet on the future rather than hold onto the past. This is tough to do when you head a publicly traded company.

Netflix? Maybe, but they would need some serious brand work first.

I’m betting on Google.