The Pay TV Model is Eroding
Carriage fees, the proliferation of apps, and why the best wager in the future of video media might not be a streaming platform company.
Does it feel like everyone has their own streaming subscription service these days? That’s because they all do. The adoption of streaming as the primary video consumption vehicle is likely to create a very large ripple effect in mainstream media, sports, and technology. The implications of this macro trend shift are large. In this report, I’m going to take some time explaining the structure of the Pay-TV business.
It’s very important that we understand “the why” behind what is driving consumption trends so we can make the proper bets on the future of media. The video consumption market landscape is completely different than it was even just five years ago. There will be a day of reckoning for a lot of the media companies that are currently offering subscription services if those services fail to replace former revenue streams. I do believe that streaming is the present and future of video media. Before we get into why the Pay-TV structure is breaking down and pick our horse to ride through that shift, first we’ll go over some industry terms that you’ll read throughout this report.
Industry Terms and Acronyms
MVPD – Multichannel Video Programming Distributor – these are businesses that package feeds from various content owners and sell those packages as bundles to consumers. MVPD is a quick way to say cable, satellite, or internet protocol television (IPTV) operator. Examples of MVPDs are Dish Network, DirecTV, and Charter/Spectrum.
vMVPD – Virtual Multichannel Video Programming Distributor – these are the businesses that fundamentally do the same thing as the traditional MVPDs, but they utilize the internet rather than satellite or cable. They’re different from IPTV because vMVPD platforms don’t require a STB and IPTV typically does. Examples of vMVPD providers are Sling TV, YouTube TV, and Hulu Live TV.
STB - Set Top Box – these are the in-home receiver units that cable, satellite, and IPTV services use as the tuner and DVR for their service feeds. It’s what the consumer points that remote at.
Major Broadcast Networks – the broadcast networks are the national media brands who produce video content that is distributed across the country. Examples of Broadcast networks are ABC, CBS, NBC, and FOX.
Local Station Groups – the local station groups are large media companies that specialize in managing local television stations. These companies work affiliate agreements with the major broadcast networks to get the rights to popular sports and prime programming. Examples of local station groups are Sinclair, Nexstar, and Gray Television.
O&O – Owned and Operated – these are local affiliate stations that are owned by the broadcast networks as opposed to owned by the local station groups. An example of an owned and operated TV station is FOX32 Chicago.
Retransmission or Carriage Fees – These are the payments that MVPD/vMVPD operators make to the Local Station Groups and the O&O stations for the rights to distribute their channels as part of the MVPD and vMVPD bundles.
Broadcast and The Rise of Cable
For most of TV’s history, the legacy broadcast networks had a very strong share of consumer video consumption. The broadcast networks utilized O&O stations and local station group affiliation deals to get national reach. For decades, TV consumers generally had access to 3 or 4 TV channels and they used an antenna to pick up the over the air video streams for free. Then cable came along. In addition to all of the broadcast networks, there were new cable only networks like CNN, ESPN, and the Discovery channel. All of these channels were combined in one massive Pay-TV bundle. And every channel in the bundle received a carriage fee from the MVPD.
Suddenly, instead of 3 or 4 channels, viewers had dozens or even hundreds of channels to choose from as long as they were willing to pay the cable provider the subscription fee to get the whole bundle. For consumers this was initially good. In addition to a plethora of new viewing choices, even the local broadcast network affiliate channels were included. Everything was in one place and viewers didn’t have to fuss with antenna signals to get their programming crisp and clear.
However, the emergence of cable and satellite providers added another layer to the distribution model. With added layers come added costs. Cable and satellite operators charged subscribers a monthly fee for the TV bundle that the consumer was buying. From that monthly fee, cable providers paid channel owners carriage fees for the rights to distribute the content through their service. When these carriage agreements are reached, the cost of the programming is always passed down to the customers. It’s critical to grasp this concept because it’s one of the biggest reasons why the business model is breaking down.
Around 2012 or so, things began to change. Frustrated with the ever increasing monthly costs and scores of un-watched channels, consumers began canceling their pay TV subscriptions. This became affectionately known as “cutting the cord.” With pay TV households in America declining and the rapid rise of Netflix, a new era in media began taking shape.
Streaming Changed the Game
This all brings us to now. Netflix has helped create a market expectation of on-demand viewing without cords or cables. To be clear, the Netflix business model is certainly not without its own issues. Sustainable or not, Netflix has proven a concept. And that concept is streaming, on-demand video. This market expectation is now disrupting the media landscape to an incredible degree. And every company that has exposure to the old model has to make significant changes before they run out of time.
Keep reading with a 7-day free trial
Subscribe to Heretic Speculator to keep reading this post and get 7 days of free access to the full post archives.