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All Bundled Up and Nothing to Watch

What you need to know about big media, Cable TV and the struggle for consumers' attention

Television has long been America’s favorite medium for entertainment, but it’s no secret that the industry is facing intense challenges to the fundamentals of its business. People’s love of television does not necessarily equate to an appreciation for (or even tolerance of) the way that they consume it.

Written by

Nick Foster

Research Associate
Table of Contents

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TV's Most Dire Drama: Itself

The cable landscape is complex at a time when consumers demand simplicity.

Customers’ needs and expectations for their entertainment shift as alternative technology changes what is possible and expands peoples’ access to content and information. Cable subscriptions have been stagnant or eroding for years, reflecting peoples’ frustrations with their experience as a customer. Entertainment is supposed to be fun and interesting, not an onerous utility on par with power and phone bills.

Meanwhile, services from far outside the traditional TV landscape are only growing in popularity. Netflix delivers more minutes per household, YouTube brings in more viewers and ad revenue in key demographics (it’s actually bigger than any individual cable network for the 18 – 49 crowd ). The catch is, people abandon cable in favor of these outlets, but cable can’t really steal them back.

So, why is this happening, what are the core issues at stake, and how can cable companies and networks adjust?

Out of Sync

The roots of many of the industry’s problems can be traced to the cable bundle, which exists basically because it can exist, has always existed (dating to 1948!4 ), and because the complex web of media conglomerates, studios, networks and local affiliates is such that certain channels must be sold together.

The sheer amount of television content available in a traditional basic cable bundle (leaving out premium channels like HBO, Showtime, etc.) is simply more than anybody can consume. Not just because on linear TV, people can only watch one thing at a time, but because there are so many channels on offer, many of which are redundant to most viewers. Do customers want and need HGTV and the DIY Network? Food Network and the Cooking Channel? Five ESPNs? Today’s average cable bundle contains about 150 to 175 channels, but the average TV viewer only regularly watches 17 of them.5 (And the “average viewer” watches a lot of TV!6)

This is a perfect example of the consumption gap in action. The consumption gap refers to a phenomenon originally identified in the high-tech space, whereby consumers simply cannot or do not consume all of the new products and features that they are paying for. There is a severe mismatch between the time, capital and effort spent putting the content or products in the hands of consumers and the actual value that those consumers get out of it. It’s not efficient for either party, but in this case it’s a particularly bad trade for consumers, who only consume about 10% of all the content that they (have little choice but to) buy.

A recent study by Digitalsmiths (a TiVo company) asked respondents to select an ideal cable bundle from a complete range of broadcast, basic and premium channels. On average, each respondent picked only about 17 to 18 channels (sound familiar?), and the average price they would agree to pay for their bundle was only about $38.7

At the same time, there are now more services than ever before that allow customers to stream the content they want at any time, at lower cost and without the burden of dealing with the almost Kafkaesque specter of “the cable company.” Each streaming service has its own niche and a set of tradeoffs versus classic cable, but each is cheap enough that an individual consumer can subscribe to several of them and still stay well below the monthly cost of a cable bill.

Much to the industry’s horror, you’ll see that ESPN is not among the most preferred channels in Digtitalsmiths’ study. For decades, television executives felt that live TV, especially sports, were the saving grace of cable’s value proposition. It’s true that the thrill of the live game lends itself to a distinct experience that can’t be replicated otherwise, but the industry may have seriously overestimated how valuable that feeling is to consumers.

As it turns out, not nearly as many people actually care about paying for ESPN as the industry wanted to believe. In an August 2015 earnings call that has since become somewhat (in)famous, Disney CEO Bog Iger commented that ESPN subscriptions actually fell for the quarter.8 This comment – exposing the fact that cable’s supposed last bastion may already be outmoded – combined with weak earnings from across the industry, caused a minor meltdown in big media stocks. Disney’s stock fell 9% in a day, 21st Century Fox fell 11%; Viacom fell 20%! If and when these stocks recover their value, the fact still remains that cable’s quiet vulnerabilities are increasingly spilling over into loud liabilities. To quote Craig Moffett of MoffettNathanson, there is “palpable sense [in the industry] that sector sentiment as changed, some would say perhaps permanently.”9

So it’s a dire time for the industry, but it’s not like it became dire overnight. Or even over a year. It’s the result of more than a decade of evolving consumer habits and business dynamics. Understanding how it got to this point will help us understand any solutions.

How Did We Get Here?

Over the past decade, the television industry has had a strange relationship with the streaming services that are now rapidly replacing them. In the same way that studios and stations would syndicate popular shows to air on other channels (there is probably not a single hour in the day when an episode of Law & Order is not playing on some channel, somewhere), so too did these players license their content to services like Netflix or Hulu. It seems like an easy decision, really: Air the content the first time around, get paid a second time to syndicate it on TV, and get paid a third time to license it to a streaming service. Easy revenue.

However, streaming services used this influx of content to increase their own popularity, riding the wave of consumer dissatisfaction with traditional linear TV and the increase in consumers’ use of online streaming and mobile video. And with this popularity, they had ample opportunity to test, develop and refine a winning customer experience, to the point where the “Netflix model” essentially defines what consumers expect to be possible in other services. Content comes and goes from the streaming services based on their licensing agreements, but the service itself always progresses to become more convenient, dynamic and accessible. People can watch Netflix, for example, on their TV, but also on their phone, tablet, gaming console or computer. Cable, on the other hand, prescribes a much more limiting experience: physically be in front of a television, tune in to a specific channel at a specific time; if you miss it, you’d better hope you recorded it or that a re-run is coming up soon.

Therefore, the proliferation of streaming and Over-the-Top (OTT) options is allowing more and more consumers to abandon traditional cable altogether. This is the famous “cord cutting” movement. This isn’t really a surprise to cable companies and big networks, either, however, but it still presents a serious conundrum. They’ve even known that licensing content to the likes of a Netflix or a Hulu ultimately feeds the beast that wants to eat them, but in a lot of cases it’s just too hard to resist, especially if the future of your entire business in flux – it only makes sense to find revenues wherever you can.

But what happens when the streamers decide they don’t want to play along in this game anymore? In the past 10 years that Netflix has been licensing all sorts of content from outside partners, it developed a winning customer experience and became extremely popular, and leveraged that position to become a content producer itself. Netflix’s original (and wholly exclusive) content gets awards attention, pulls in even more subscriptions and serves to forge a distinct content brand. The other side of this strategy is that Netflix is less interested in paying to license another company’s content, unless it’s an exclusive deal. Earlier this autumn, Netflix declined to re-up on its decade-long deal with Epix, a premium cable channel with the rights to much of the Paramount oeuvre, for exactly these reasons.10 It may seem like a small thing, but this case it might be a vision of things to come. What if other streaming sites follow suit? Netflix is hardly alone in producing its own original content. Amazon, Hulu and even Crackle, to name a few other services, already have their own growing libraries of original movies and shows that could potentially provide enough of a viewer base to slake their thirsts for licensed third-party content. If this happens, and if trends in cable subscriptions continue to decline (which they naturally would if the streaming environment only becomes richer), then cable networks will have to find a different way to get their content made and seen.

These trends will only continue in the future unless the cable industry – meaning the broadcasters and the networks and studios that create actual content – transforms and innovates in order to either change that future or take full advantage of it.

New Challenges, New Opportunities

Because of the blending of consumers’ online and traditional media preferences, it makes sense to think about both aspects as being part of the same universe.

This year, Facebook will capture more advertising revenue than any media company except Disney, and next year could very well be the overall leader. The same goes for YouTube, which currently captures more advertising revenue than a host of traditional and online companies; in two years it will capture more ad revenue than media conglomerates Viacom and Time Warner. That same research establishes that growth and change in overall ad spending are trending closer and closer to the overall trajectory of GDP growth12 … and the GDP is growing, even if it’s only slowly. The pot is expanding but the allocation is shifting away from traditional players, following consumers as they spend even more time online.

A look at the top “networks” by minutes of content delivered reveals just how powerfully diverse media viewership becomes when you consider the whole range of online viewing platforms. On a monthly basis, Netflix stands very tall near the front of the pack alongside major broadcast networks CBS, NBC, Fox and ABC, but unexpected players emerge from the background. For example, Twitch, an online channel owned by Amazon that broadcasts live feeds of various video game tournaments, would qualify as a Top 75 network, delivering even more minutes than Amazon’s own Prime streaming service, which is much more mainstream and visible to consumers.

Consumer attentions and interests are simply being captured and satisfied outside of traditional media to an extent that television can’t match in its current state. The fact that online viewing is rising so much in relation to the fall of linear television is not necessarily an indication that people are simply replacing their cable content with similar online content; rather, it raises the open-ended possibility that they are seeking entirely different genres of content that cable simply never dreamed of and may still be unknown.

What other unmet needs are out there? Whoever can tap them first would get a huge prime mover advantage in the “ratings” of viewers’ attention. If an online service captures those viewers first, they aren’t likely to look for cable to make a better offer. In order to stay afloat and innovate for the future, both parties can help themselves by being innovative. Cable companies themselves can change how and what they sell, and the content producers and cable networks can change how they actually get their content from their studios to their viewers’ eyes and ears.

But first the broadcasting industry will have to acknowledge that cord cutting is more than a fad, and that traditional cable subscriptions will likely never rebound to where they were even five years ago. Most are firmly convinced, but there is a lingering sense of skepticism or even disbelief amongst some cable leaders that the cord cutting trend has legs at all. They reason that if it is a result of the fact that millennials don’t have that much money to spend, then it must be only temporary; when they get older and more affluent, they will see the value in cable and bundle up.14 Whether or not millennials actually have lower spending power than the previous generation, the ultimate fact of the matter is that their consumption habits and interests are in many ways fundamentally different. Many young adults will proudly tell you that they don’t even own a television.15 There’s simply no point to it when you can satisfy your every entertainment need with just a laptop.

As a response to the cord cutting movement, the idea of the “skinny” TV bundle has become popular, but still not fully realized. Verizon is the first major provider to “slim down,” offering a basic expression of the skinny bundle via its “Custom TV” subscription options. These allow FiOS customers to subscribe to a default field of broadcast and basic cable channels in addition to two “channel packs” curated around a specific theme. Adding more channel packs is possible, though the price point increases with each addition. It’s a start, but it’s likely not the ideal vision of a skinny bundle that proponents of “cord cutting” have in mind. The minimum bill for “Custom TV” (and FiOS Internet service) is about $80 per month, which is about twice the ideal price identified in Digitalsmiths’ study. Compared to today’s average bundle prices, it’s not that much of a savings, and most customers would still be left with a large number of unwanted channels since they have to select by bundles and not individual channels. It would be truly revolutionary if there were a cable provider that let you pay by the channel. If I only wanted the regular (free) broadcast networks and AMC, ESPN, FX and CNN, for instance, and if I could only pay for those channels, there would be no consumption gap at play whatsoever.

But still, it’s a major step forward, even if only for the fact that it’s now possible for a FiOS cable subscriber to not have ESPN. This is a source of great controversy in the industry. The web of agreements and conditions in place at the highest levels of the media industry are such that Disney actually sued Verizon over this, claiming that Verizon was violating a carriage agreement stipulating that ESPN could not be sold in any package other than by default. The case is still ongoing, and Verizon will presumably continue to do this unless it is legally compelled to reverse course. Combine these kinds of corporate shenanigans with the high prices and relatively low utility of cable, and it’s easy to see why people would be fed up.

The longer that it takes cable companies to make “skinny” TV into a viable alternative, the longer that new and unexpected competitors have to beat them to it. Satellite provider Dish Network (the cable industry’s other nemesis) has already launched Sling TV, a standalone service that provides a handful of channels (notably, including ESPN) for just $20. Disruption is the name of the game; the next big threat could come from outside of the television landscape altogether. For example, in some cities Sony now offers a skinny package called “Vue” via a PlayStation console, which provides a few dozen basic cable channels for $50 per month. Where might the next skinny TV pioneer come from? Sure, there’s a complex web of arrangements to untangle on the road to more economical cable options, but time waits for no man, woman or conglomerate.

Meanwhile, innovation outside the broadcasting sphere inevitably leads to questions about streaming and over-the-top services (OTT); about how to bring content directly to the consumer the way that Netflix does, for instance, without piping it through a separate carrier. The studios and television networks want to de-couple their content from the traditional cable distribution network, which could fundamentally alter their businesses. But there is a promising future here for networks that can pull it off. Again, people aren’t losing interest in watching this content; they are losing interest in paying for a whole lot more of it than they actually want.

The successes of Netflix and Hulu, not to mention the outsized impact of smaller, niche online channels like the aforementioned Twitch, demonstrate the demand for online alternatives, but so far there have not been too many examples of a cable network creating a streaming service specifically for its own content. The biggest and best example today is HBO Now, which lets people subscribe to HBO’s very popular content independently, instead of in addition to a bigger cable package. People elsewhere in the industry are very aware that OTT is a significant ideal to pursue, but either don’t know how to make it happen or are uncertain that their networks even can.

As a side note, streaming and OTT are also great tools to monetize older content that wouldn’t be a good fit for a linear TV lineup due to perceived lack of interest. For example, Paramount (a Viacom company) recently uploaded dozens of older feature films to its Paramount Vault YouTube channel. Those films weren’t doing anything before, so why not put them on YouTube, put an ad or two in front of them and hope to catch some of YouTube’s bountiful viewers and ad revenues? Even the smallest sail will catch some wind. It’s just another incentive to experiment in the online or OTT space.

The fact remains, however, that cable bundles bring in so much revenue for cable providers (and drive so many affiliate fees for networks) that it complicates their incentives to change. ESPN alone takes in about as much revenue per subscriber as Netflix, and even if Netflix were to double its prices it would still only produce a fraction of the revenue per user that a typical cable bundle currently does. (Incidentally, Netflix recently raised its prices by just one dollar. ) Why stray from a model that brings in so much money when streaming it would gut your revenue? They may still make a lot more money than Netflix, but Netflix has the advantage because their customers want to be there; cable customers feel like they have little choice but to be.

Therefore, given that these actors have a lot to lose in switching their distribution models, they are very cautious about how to do it. To them it’s either too early or too late. Some leaders think they should wait to go OTT until the economics of it make sense to them. But based on their urge to protect fat cable revenues, it will never be the “right time.” Netflix has already so completely undercut the market with its price point, offering such an advanced user experience by comparison, that a cable network shifting to an OTT model would face severe difficulties in standing out. Consequently, many network leaders are worried that it may actually too late. Some of our clients at a major cable network worry, “How many OTT providers can the market support? Are we reaching the point where it will be too late for us to launch?”19 Both concerns are reasonable, but doing nothing simply is not an option.

But of course, the innovations that could shape both sides of this story are not isolated from one another. For example, what if Verizon wins its suit with Disney? And what if Verizon’s trimmed-down offerings are a big hit? Surely, it would entice every other cable company to follow suit and give the option to drop ESPN (and more!). Skinny TV would become even more feasible, giving cable customers more cost efficient options that actually interest them. But what happens to Disney in that scenario? What if your content is the “fat” that gets cut out? If it becomes harder to sell content and capture viewers on linear cable, then that would make OTT more appealing for some players, and spell doom for others. Maybe in this post-skinny, post-OTT world, the television supply would normalize to the actual demand; maybe there would be no market for redundant stations like Food Network and the Cooking Channel after all. The TV landscape could change dramatically, so concerned players will need to be proactive in how they change with it.

A Strange and Exciting Future

There will never be a “right” time for cable networks or cable broadcasters to change their business models. Even if there were, by the time that idyllic perfect moment arrives the chances are that a smaller, more nimble and more niche player will have already eaten up viewers’ attentions. The important thing is simply to try; to experiment; search for unmet needs and experiences that the competition hasn’t filled yet. Just because something doesn’t seem feasible at scale doesn’t mean that it’s not worth pursuing in miniature. Who knows where the experiment could lead?

For networks and studios, the priority should be to start experimenting with how an OTT service could be possible, how they could and would implement it, and how doing so might change how they produce and market their content. It’s an entirely different ballgame. For instance, upfronts and pilot season aren’t the same kind of yearly crucible online as they are on linear TV; advertising and affiliate revenues take a back seat to subscription revenue. Part of the challenge will be to either develop a distinguishable brand that drives interest and subscriptions for their service, or find a way to get their content onto services that already have one. HBO Now created a lot of excitement because HBO is a recognizable, high-value brand; people know what to expect when they see the logo. But does Turner Broadcasting, another Time Warner unit, have a similar cachet? What about USA (NBCUniversal) or FX (Fox)? If they don’t have that kind of imprint right now, that doesn’t meant that it’s not possible for them to develop one.

It will take some deep introspection to find the insights and inspiration to inform this transformation. A network may find that it isn’t producing the kind of TV that would set it apart, or that its people proud of making. We saw some of this introspection at a recent engagement with a cable network20 : “How can we be innovative in our programming if we keep relying on traditional models?”; “We need to think of other ways to creatively vet our new shows… for example, eliminate testing to ensure innovative choices.” Maybe a network will look inside and find that they are playing in the wrong space entirely. For example, the same client wonders if it might be best to position itself as a software company, rather than primarily as a studio for television content, to better serve the online user experience and distribution model. Wherever a network’s thinking takes them is a good direction as long as it’s different from the status quo. Things need to change, but how and why remains to be seen. It’s up to the players involved.

Meanwhile, cable broadcasters need to keep pushing the envelope of what their contracts with networks and media conglomerates will allow. Pending the final results of Verizon’s suit with Disney, the industry may fall into a race to see which company will be the first legacy cable provider to offer a true, fully a-la-carte skinny package. In turn, this opens up room for experimentation to find more nuance in consumers’ price tolerance. What is the minimum viable product that people will pay for? How many channels are too much; how few is too few? Cable definitely needs to change course sooner or later, lest its subscriber base dwindle even further, so any experimentation and change is a positive development.

The industry can’t move forward without making changes and letting go of the status quo that keeps it tethered to a past era. It needs to experiment to find its future.

1 Business Insider, “This is the scariest chart in the history of cable TV,” August 15, 2015.

2Tech Crunch, “People Watch More YouTube Than Ever Before – Especially on their Phones,” July 17, 2015.

3 Morgan Stanley Research, “Pressure in the System – 2Q Earnings Preview,” August 3, 2015.

4 The Wall Street Journal, “Why Does the Cable-TV Bundle Exist Anyway?” June 8, 2015.


6eMarketer, “U.S. Adults Spend 5.5 Hours with Video Content Each Day,” April 16, 2015.

7Digitalsmiths, “Q2 2015 Video Trends Report,” 2015.

8 DIS Earnings Call, August 8, 2015.

9 Barron’s, “The Media Mess,” August 8, 2015.

10The Wall Street Journal, “Netflix Ends EPIX Cable Deal, Pulling High Profile Films,” August 30, 2015.

11Morgan Stanley, “Pressure in the System.”

12 Ibid.

13 Jason Hirschhorn, “7 Deadly Sins: Where Hollywood is Wrong About the Future of TV,” Published on LinkedIn Pulse, May 25, 2015.

14 Ibid.

15TIME, “10 Things Millennials Won’t Spend Money On,” July 2014.

16 International Business Times, “ESPN Verizon FiOS Lawsuit: ‘Skinny’ Cable Bundles a Breach of Contract, Disney’s Sports Network Says,” April 27, 2015.

17 Barron’s, “The Media Mess.”

18 The Wall Street Journal, “Netflix Raise Price for New Users by $1 a Month,” October 8, 2015.

19 Client feedback comments from Pulse

20 Client feedback comments from Pulse.

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