Saturday, November 06, 2010

Suppose you bought TV shows...

Like you do steaks: one at a time.  That could well become a significant business model in the near future.

This is a potentially disruptive innovation for the television industry because one of the main ways the industry had practiced price discrimination (and therefore increased both revenues and quantity) was to engage in bundling. A switch to a la carte will probably result in an increase in consumer surplus per unit demanded but a drastic decrease in quantity supplied. (“Consumer surplus” is econ jargon for the subjective experience of a “bargain”).
Suppose that my household values watching True Blood and Mad Men at $5 an episode, Top Chef at $2 an episode, and Mythbusters and Toddlers and Tiaras at 50 cents an episode. Now suppose that my next door neighbors have the exact opposite set of preferences. In both cases there is a total of $13 of demand for television per household per week. If the cable company charges $12.99 per week, both my neighbor and I will write the check, but do so reluctantly as we’re just barely this side of the indifference curve.
Now suppose that someone (say, Apple or Amazon) starts selling shows a la carte. If the price point is 50 cents both my neighbor and I will still watch all five shows. However we’ll only be paying $2.50 a week and will be getting $10.50 in consumer surplus. If the price point is $2, each of us will get three shows and pay $6, for $6 in consumer surplus. If the price point is $4.99 we’ll each buy two shows, pay almost $10, and get two cents of consumer surplus. There is no price point where we both pay $12.99 like we used to. At any one a la carte price point, both my neighbor and I will pay less than we used to, watch the same or less amount of tv, and get the same or higher consumer surplus.
Thus a switch to an a la carte model implies much lower costs to the consumer. Because revenues would fall, so would production by some combination of reduced numbers of shows and reduced production values. Basically, we’re looking at an end to the television renaissance we’ve enjoyed since the late 1990s as people like me decide that we’d rather pay $10 or $20 a month for the few shows we love and do without the rest than pay $50 a month for a bunch of stuff, most of which we don’t even really like.
However desirable the trade-off of less viewing for a much lower price may be, it may prove unsustainable in the long run. I may love Mad Men so much that $2 an episode to stream to my Roku feels like a bargain. However these shows may only be economically viable because there are also some people who have a marginal attachment to the same show and the current business model of cable bundling lets the content producers effectively get several dollars per episode from the cult following and maybe fifty cents an episode from the casual viewers.
That is to say, television may not be economically viable when priced on an a la carte basis and this could lead to a decline in volume and possibly quality of original programming. This will probably involve a slow decline but could be catastrophic. The most likely scenario for a catastrophic collapse is if the studios forecast that a la carte means declining revenue and try to pare back their cost structure in anticipation. This would probably lead to a militant slate getting elected at both WGA and SAG and an even worse strike / soft strike than we had on the last contract cycle. [More]
This type of platform crosses that critical line from "free" to "cheap" and that is a quantum leap in cognitive psychology.  I agree it would be deeply disruptive not simply to television production but also the advertising business models that currently support it.  It could even revitalize broadcast TV to some extent.

Meanwhile, the emergence of powerful new ways to get TV is not exactly making things easy for the distribution system.
The number of programming blackouts this year between content owners and distributors has escalated to the highest level in at least a decade. TV providers, like AT&T, are trying to stem rising programming costs, which are typically passed on to consumers, in a weak economic environment. Programmers are trying to maximize their distribution and content fees.
AT&T said Scripps is demanding it pay more than double what its competitors pay for the same programming.
Scripps denies the claim, saying the "impasse is not about money" and that the two parties came to an agreement in principle before their deadline.
The problem, Johnson said, is that Scripps did not want to sign away rights to its programming on various non-TV platforms without specifics from U-verse.
"They are asking for broad, unlimited distribution on nonlinear platforms that go well beyond emerging media technologies," Johnson said.
A spokesman for AT&T declined to comment further, referring the Tribune to its earlier statement: "We've been working for weeks to reach a fair deal, but they didn't hold up to what had been agreed upon verbally, leaving us without the rights to offer these channels.
"We apologize to our customers who've been affected by this. We want to keep these channels on, at a fair price for you."
Increased use of video on the Web and mobile platforms represents new territory for programmers like Scripps and providers like U-verse. While Internet video services like Hulu and Netflix Streaming have wide popularity, their offerings are typically not comprehensive. [More]
Technology is often destructive creativity, and few can come close to predicting how putting more choices into consumer hands will play out on a macro-scale.  Heck, we can't even explain most developments after the fact!

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