How To Reinvent The TV Industry A New Business Model For New Times by Bobby Tulsiani with Mark Mulligan and Erik Hood Executive Summary What s the TV industry to do when it looks into the future and sees a business with lower margins, smaller audiences, and its brands being destroyed? Forrester models the revenue potential for each of the new online TV windows and analyzes how the current model for TV will position the industry for certain failure. We propose a new business model for new times. The THree revenue streams for INternet TV It s been almost four years since ABC and Apple began the current experiment in TV and the industry has evolved greatly. As we detailed in our research last year, the online medium has opened up three new release windows for TV content (see Figure 1): 1 commerce. Since Apple launched its itunes video store, downloads have expanded to include new distributors (Amazon s on Demand), variable pricing ($0.99, $2.99), and even premium TV networks (HBO and Showtime). However, even with all these changes, Forrester forecasts that the TV download market for all video will generate just $467 million in the US and 179 million in Western Europe in 2009. 2. Most consumers are not used to paying à la carte prices for online TV content. That paradigm has forced networks to introduce windows, where the online consumption of full episodes has flourished. Nielsen Online s April 2009 Census ratings indicate that ABC s Lost has 1.4 million unique viewers and 35.8 million streams. 3 syndication. Whereas takes place on a network-owned and operated site, such as Lost on ABC.com, syndication takes place on a distributor site such as Lost on Hulu. Syndicating to large video aggregators, such as Hulu and YouTube, allows networks to get their content in front of more viewers and capture more advertising revenues. In fact, our forecasts have advertisers spending $1.2 billion in the US and 323 million in Western Europe on video advertising in 2009. 4 Headquarters Forrester Research, Inc., 400 Technology Square, Cambridge, MA 02139 USA Tel: +1 617.613.6000 Fax: +1 617.613.5000 www.forrester.com
2 the Problems with the current internet tv model While the $1 billion-plus aggregate revenue figures for TV are nothing to scoff at, they mask the problems that individual shows will face. We estimated the revenues for each window for a typical episode of NBC s popular comedy (see Figure 2). In our example, the online TV windows generate $344,000 of revenues or about 6% of one episode s total revenues. Considering a typical hour of network TV costs more than $1 million to produce, that tradeoff is unsustainable and will leave the industry facing a host of issues: Figure 1 The Three Release Windows For Online TV value chain Create Produce Aggregate Distribute Consume Consumers Creatives Studios Networks Distributors Devices Producer Episode NBC TV commerce download itunes ipod $467 million (2009 consum spending revenu Release window syndication NBC.com Hulu $1.2 billion (2009 advertisin revenues) Commerce Season Best Buy player Syndication Episode TBS Comcast Set-top box and TV 53771 Source: Forrester Researc 2009, Forrester Research, Inc. Reion Prohibited
3 Figure 2 Case Study: Revenues Per Release Window For value chain Create Produce Aggregate Distribute Consume Consumers Creatives Studios Networks Distributors Devices Producer episode NBC Television $3,500,000* (16 ads x $20 CPM x 8 million viewers) commerce download itunes ipod $200,000* (100,000 downloads x $1.99) Release window syndication NBC.com Hulu $80,000* (4 ads x $20CPM x 1 million viewers) $64,000* (20% rev. share @ 4 ads x $20 CPM x 1 million viewers) Commerce Best Buy player $2,200,000 Syndication episode TBS Comcast Set-top box and TV $650,000 *Source: TAMi (http://www.nbcumv.com/special/tami_19may09.pdf) Source: The Numbers (http://www.the-numbers.com/dvd/charts/annual/2008.php) Source: John Demsey, Josef Adalian, & Josef Adalian, Office, Earl land at TBS, Variety, June 21, 2007 (http://www.variety.com/article/vr1117967376.html?categoryid=14&cs=1). 53771 Source: Forrester Research, Inc. Cannibalization. Jeff Zucker, CEO of NBC Universal, has warned the industry about trading analog dollars for digital pennies, and we ve demonstrated that tradeoff above. 5 Technology is already challenging the first premise of the current TV model that you can drive viewers back to the TV by keeping the content online. Consumers are connecting their PCs to their TVs, buying connected TVs, and utilizing gaming consoles to make the difference between screens negligible. Fragmentation. Over the past few decades, as we have moved from four broadcast networks to 400 cable networks, audience sizes for each show have became smaller. The move to online TV has expanded user choice at exponential levels and is sure to fragment audiences for each show even further in the long term. 6 2009, Forrester Research, Inc. Reion Prohibited
4 Disintermediation. As TV networks place their content on video aggregators like Hulu, the role of network brands like ABC and NBC becomes less valuable. While show brands like The Office and Lost flourish in an on-demand model, the ability to brand at a network level or crosspromote titles diminishes. The end result looks more like the movie studio system, where the average consumer couldn t tell you which studio produced their favorite film. Recommendations How to Reinvent the TV industry a new business model for new times TV executives are trying to manage a gradual transition between the revenue streams. However, the current model where some networks put some content online, some of the time, in the hope that a business model will eventually appear is incomplete and short-sighted. Four years into this experiment, we believe that the time for gradual steps is over: It is time to launch a subscription on-demand video that allows consumers to access a huge library of content whenever and wherever they want. Make no mistake about it, the transition to a new business model will certainly be difficult and involve some cannibalization of existing revenues. We don t pretend to have all the answers, but we do offer a bold proposal for your consideration. Launch an on-demand subscription TV for previous seasons. Yes, we know that music executives still cringe when they discuss online subscription s, but their failures should not deter the TV industry, where cable subscriptions are an established model. Netflix is already marching down the path, so you can call this version Hulu-Prime or form a new company altogether. But either way, getting access to seasons one to five of Lost on the same Web site that offers seasons one and two of Mad Men is a powerful value proposition for which users will pay. And, by the way, it s OK to have video ads in the content for the subscription. Stop putting your current seasons on Hulu. Chasing volume on aggregators is not going to solve the digital pennies dilemma any time soon just ask the newspaper industry if you don t believe us. And the current season of Lost is inherently more valuable than any of the previous seasons. When you sell TV syndication rights, the deals do not involve the current season, and online syndication should be no different. Reclaim your network brand. Let users know on broadcast that your Web site is the only place to watch the current season. Make sure when users show up, you give them an exceptional experience you don t have to be a new media company to have a clean page without obnoxious banner ads. Don t treat users like a cost center and only run ads for detergent run ads that highlight your fall slate and run ads that build your network brand. Make sure aggregators pay for previous seasons. We are not talking about clips or old episodes of Jerry Springer: Those can go on Hulu or YouTube without an upfront payment. But before you give away earlier seasons of or Mad Men, make sure those aggregators 2009, Forrester Research, Inc. Reion Prohibited
5 pay you and that they pay you upfront. The owners of YouTube believed the company was worth $1.6 billion and the owners of Hulu believe it is worth more than $1 billion, so they can certainly afford to make a payment an equity payment will be fine as well. If they don t want to pay, include the digital rights when you sell the syndication TV rights. Create a viable alternative to Hulu. Consumers and content companies benefit when there is distribution competition. However, with Hulu locking up three major broadcasters for the next two years, one powerful player may control too many of the rules. When Fox launched a fourth network in the 1980s, it brought edgier content to broadcast than ever before, it overpaid for NFL rights to gain distribution, and it innovated with new types of shows, such as The Simpsons and 24. 7 TV.com, YouTube, or any other new entrant that wants to compete with Hulu needs to move beyond revenue shares and offer differentiated value upfront payments, premium content (such as HBO or NFL), multiplatform access, or some other game changer. Endnotes 1 video consumption exploded in early 2007. Business models have not yet caught up with consumer demand, and several players in the value chain are eagerly positioning themselves to take advantage of a billion-dollar market in 2008. See the March 28, 2008, The Television Value Chain report. 2 Source: JupiterResearch Paid Content Model, 11/08 (US) and JupiterResearch Activity and Paid Content Model, 07/08 (Western Europe). 3 According to the latest data from Nielsen Census for March 2009, ABC.com continued to deliver the most viewed series online in terms of unique viewers. For the second month in a row, ABC s site had 9 out of the top 10 series viewed on broadcast sites. Source: Robert Seidman, Once again, ABC delivers nine out of the top ten most-viewed shows on the (not counting Hulu), TVbytheNumbers, April 10, 2009 (http://tvbythenumbers.com/2009/04/10/once-again-abc-delivers-nine-out-of-the-top-ten-most-viewedshows-on-the-internet-not-counting-hulu/16512). 4 Source: Jupiter Research Advertising Model, 6/08 (US) and JupiterResearch Advertising Model, 12/08 (Western Europe). 5 In a report released Monday that knocked a few percentage points off big media companies stock prices, Lehman Brothers s Anthony DiClemente said he doubted the reigning content kings would be able to maintain their revenue due to new forms of distribution. Source: Liz Gannes, Will Digital Revenue Ever Replace What It s Displacing? NewTeeVee, July 8, 2008 (http://newteevee.com/2008/07/08/will-digitalrevenue-ever-replace-what-its-displacing/). 6 It is worth noting that in recent years, some broadcast networks (such as CBS) have been able to increase ratings and cable networks continue to gain audience. However, much of this growth is due to new households and pay-tv subscribers. The longer-term macro trend is toward audience fragmentation. 7 It is also worth noting these examples are not exclusive to the US; BSkyB similarly entered the UK market by overpaying for soccer s English Premier League rights. Forrester Research, Inc. (Nasdaq: FORR) is an independent research company that provides pragmatic and forward-thinking advice to global leaders in business and technology. Forrester works with professionals in 19 key roles at major companies providing proprietary research, consumer insight, consulting, events, and peer-to-peer executive programs. For more than 25 years, Forrester has been making IT, marketing, and technology industry leaders successful every day. For more information, visit www.forrester.com. 2009, Forrester Research, Inc. All rights reserved. Unauthorized reion is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. To purchase reprints of this document, please email clientsupport@forrester.com. For additional information, go to www.forrester.com. 53771