SpectatorBytes

Hulu’s content partners decision to pull out of their relationship with Boxee has gotten me thinking: “Here we go again.” The existing TV and Film ecosystem will continue to focus on protecting the existing model rather than focusing on embracing the new one.

Over the past 15 years, I have witnessed first-hand a significant amount of change in the media landscape take place. Many media businesses had to change their business models, find new product offerings, and shrink their cost structures dramatically.  In several instances, they simply were completely obsolesced.

In many of these situations, the need for change seemed evident to most third party observers before it was to internal management. Third parties (innovators, strategists, emerging competition) are the ones who usually start calling for the adoption of new strategies to address what appears to be evident changes in market trends. The reason is that these third parties are quicker to appreciate the signals of a new world order when they first appear.

The story is usually different for corporate insiders. Their initial reaction to new market trends is to negate them rather than embrace them. Most corporate cultures in media today seem to focus more on protecting their existing business models rather than embracing the new ones. Generally, the belief is that most trends do not come to pass at all (or at least not during the tenure of the current managers). However, this has not been the case in the digital age. So far, the end result of this approach has been a continuous deterioration in value for many media companies.

The music companies were the first victims. Newspapers and magazines seem to be next in line. The interesting thing is that the need for change in these businesses was prescribed far before the effects of secular changes began to make an impact. It was more than 10 years ago that the death of newspapers was widely being discussed across the industry. It is only in the past couple of years that the newspaper companies began to falter and clearly be unprepared for what they are facing.

Driving change is extremely hard. Having been part of the transformational process at AOL, I appreciate how difficult is to bring about change. However, one thing is clear to me after all these years: If a (media) business does not move as fast as possible to adjust to new market realities and embrace new models, it will pay for it.

In this case, TV networks and MSOs seem to be threatened by Boxee. What would they need to do if they were to embrace Boxee rather than fight it? Please keep in mind that Boxee is a service still in alpha. However, the decision has created a heated discussion across the industry and among Boxee users. This makes me view this controversy as a signal of change.

So, let’s imagine what MSOs would have to do if they wanted to embrace the model today:

First, define the new reality: A good segment of consumers is likely to opt for an Internet-only experience. This is not going to happen today but could happen over the next 10 years. Recognize that device manufacturers, digital innovators, and software players are all working towards making this a reality. This increases the chance that the internet experience will be better than the current TV experience. Although many people will still continue to favor the existing TV framework years from now, other consumers will discontinue usage. This is analogous to the current state of the newspaper industry.

Second, redesign their TV product offering around tiers of programming to avoid losing  all of the internet-only subscriber base. Today, the subscription decision is binary (one either has cable TV or not). Changes to the TV offerings require changes to programming deals. This may result in some networks facing significant declines in their affiliate fees. Must-have networks (e.g., ESPN) are likely to accrue larger fees while less compelling networks are likely to receive no affiliate fees. We may see major stand-offs between TV programmers and MSOs, as network owners are likely to package A-tier networks with B-tier networks. However, this is an inefficient practice that will likely end in light of the new consumer behavior. All of this would focus on optimizing long-term margins of the existing TV business.

Third, offer new services that enhance the TV experience. DVRs and VOD services are good first steps. However, as content becomes available on the Web on demand, the pricing for these services will be challenged. This means actively engaging with third-party innovators seeking to develop value added services around TV and the Internet. This would mean embracing Boxee rather than fighting it. Said another way, controling the innovation ecosystem may turn out to be a better strategy than fighting it.

Fourth, identify ways to charge more for the internet offering. This is an area most MSOs have already begun to explore. However, Telco competition will constrain pricing power.

Fifth, align marketing costs to new revenue potential. Subscription businesses tend to over spend on marketing after reaching high levels of penetration. The science of acquisition marketing is usually more art than a science.

In this new world, TV networks will likely have to redesign their cost structure. Most networks will continue to rely on hit TV programming for new revenues, and face the reality of lower advertising and affiliate fees. Networks without hit product will struggle to get distribution with MSOs and likely fail to reach scale to maintain their current cost structures.

This is clearly a lot of change. I can see why the TV ecosystem would try to “manage” it rather than embrace it. There is significant value at risk. However, in this age of digital change, most of those who have try to “manage” the consumer or “pace” the revolution seem to have lost.

Please note that this is simply a thinking exercise about what type of things one may want to do if the goal was to embrace change. This is not an exact recipe to execute such a change. As they say in the army, one needs to evaluate conditions on the ground before designing a plan of attack.

Nevertheless, quickly embracing change likely ends up being a better strategy to protect value in the long-term. While in its early days, Hulu will prove to be a good example of that.
I would like to hear if your experience with this type change has been different.