Should the Pay TV model be retained – even though it is wrong?

According to American research changing the Pay TV model from an autocratic model (you can get what you want as long as you buy prescribed bundles) to the one that is preferred by customers (they can select and choose what they want to buy) would mean that two-thirds of the current Pay TV channels will not be able to survive. According to the research by the banking firm, Needham & Co, the typical US family only watches between 16 and 20 channels, even though they have access to an average of 180. Percentage-wise the situation in Australia is roughly the same.

Within the current mass market model, if customers were to be given the choice the operators simply would not attract enough subscribers to most of their channels, and therefore they would not be able to sustain their current overall cost model. In all, within such a massive transformation it is estimated that some 1.4 million jobs and some $US45 billion ($A49.78 billion) in advertising revenue would be lost.

Even if one takes into account that the report was perhaps biased towards the plight of the incumbent industry, and that some of the predictions might therefore have been overstated, it is still a very bleak picture indeed for the traditional industry that is resisting change. This applies as much to Foxtel in Australia or Sky TV in New Zealand as it does to the operators in the USA. Its future is similar to what is being faced by many other sectors – to survive in a digital economy a significant portion of the costs must be removed. Of course, this can be ignored, but one only has to look at newspapers, book publishers, the music industry and the retail industry in general, as well as to companies like Kodak, Nokia, Microsoft and Blackberry, to see what happens if these trends are disregarded.

The writing is clearly on the wall. Millions of people are cutting the so-called Pay TV cord; they are moving away from the television set and using their tablets to bypass the traditional ways content is delivered, and they are using new services from the so-called over the top (OTT) providers who offer an ‘a la carte’ model using broadband-based delivery models.

So it might be true that in the American situation $US80 billion to $US113 billion of US consumer value would be destroyed if the industry changes its business model simply in a linear way – but who would do that?

The research seems to indicate that the model should not be changed as that would lead to the disasters listed. So should the current Pay TV model simply be continued because of the ‘poor’ industry find it difficult to transform itself? Can they continue to ‘tax’ viewers who do not watch most of the channels by still forcing them to subscribe to the packages that work in the interest only of the Pay TV operators?

 It is fine to make statements like this to create a shock effect for politicians, in a bid for protection or for a media headline, but no responsible company would be foolish enough to move in that direction. However, if Pay TV operators don’t change the reality is that many others will jump into that space and start eating their lunch by building a whole new industry – one that could, over time, compensate for those financial and job losses in the old industry as new forms of entertainment are added to the old models.

People love their entertainment. It is the industry structure that is the problem, not the customers. And changes are already happening. Apple is now one of the largest entertainment companies in the world and YouTube (Google) is not far behind.

While the projected loss might be damaging for the incumbents, at the same time it will be a gain for consumers, who will get access to their preferred entertainment at significantly less cost. And competition and new technologies will favour the customer once they have the opportunity of choice. Fighting against the trend will, in the end, be futile. Biting the bullet now and starting an orderly transition based on new business models would be a better option for the incumbent industry than fighting rearguard battles and protecting the old model at all costs. That would eventually bring about their downfall.

It is interesting to see that Foxtel is moving in the digital direction, but their new models are still mainly aimed at protecting their current business and current revenues.

The average US entertainment channel costs around $US280 million to operate, including staff, programming and transmission costs. Based on those numbers each channel needs 165,000 viewers over the course of one year if it is to break even. While the market is significantly smaller the Australian situation will not be all that different. Interestingly, operating an OTT ‘digital channel’ could be done for as little as 10%-20% of that cost.

Obviously if the industry decides to change business models these high-cost structures will disappear, as they can utilise far more efficient and effective digital structures for every part of their business.

In Australia the old business model leads to Pay TV subscription prices of between $50 and $100+ a month. In comparison, the Australian Fetch TV model, based on IPTV, costs between $10 and $15.

The industry however, doesn’t talk about transformation. It is obvious that if, in a linear way, the old business model is retained and, in one way or another, the channels are reduced to the ones specifically requested by the customer, the per-channel cost to each household would rise sharply. Clearly that does not make sense, but is that a good enough reason to stick to the old model? Shouldn’t the solution be based on structural changes to the industry? We also know that for the lesser-used channels different models can be applied, based on niche subscription markets; and others simply need to be supported by the commercial organisations that are often already involved (cooking, fashion, shopping, etc).

Resisting true change means that the OTT providers are given a free rein to introduce new business models without too much competition from the incumbents. The incumbents are currently very powerful, but in time their positions will be significantly weakened by the new players using ever-increasing broadband capacities to make the delivery of these services better and cheaper.

Paul Budde

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