The Audience Has Spoken: The Business Model Shudders

Michael Hedges September 26, 2013 Follow on Twitter

There are some who believe online media is a bubble about to burst, a house of cards so to speak. With the advertising model under constant repair, paywalls and subscriptions seem the most reliable revenue streams. Media consumers are evermore enticed by unique content so long as the price doesn’t wreck the household budget and broadband speed is sufficiently high. Staying in the middle of it all is the emerging business model.

The big news from the 65th annual Emmy Awards last weekend was that the Netflix-produced “House of Cards” won only one statuette, to David Fincher for best director of a drama series. But these awards celebrate the art of television rather than the business model. IPTV network Netflix added original content to its service two years ago as it expanded internationally. “House of Cards” nomination for Emmy Awards was more than sufficient recognition by the television industry that times have changed.

California-based Netflix jumped across the border to Canada in 2010 and has now captured 17% of Canadian homes, said the 2012 annual report of media and telecom regulator CRTC, quoted by Globe and Mail (September 24). “We're looking at a communications environment that is radically different from what it was only ten years ago,” said CRTC vice-chairman Peter Menzies to a conference of cable operators ahead of the report’s release. “Since then, the structures, the business models, the products and the technology of the industry have been dramatically transformed; to say nothing of the needs, the tastes, the expectations and the behavior of consumers.” A different survey suggested 25% of Canadians, mostly in the western provinces, have signed up for Netflix, some using IP routers to access the US version. The CRTC is exploring the possibility of extending Canadian content quotas to online video services.

The Netflix business model has jumped the shark, in this case cable and pay-TV operators. For one monthly price and no commitment, TV fans are offered all the shows and movies they can absorb. The service is particularly popular among serious fanatics who can binge on every episode of a series at a sitting. All that’s needed is fast broadband to connect to any IP device. Netflix moved into Latin America in 2011.

In one week last September Netflix swooped into Denmark, Norway, Sweden and Finland, all with fast broadband available and English commonly spoken. A few weeks later HBO, part of Time Warner Communications, launched its Nordic video on demand service. Netflix service to the UK and Ireland began in January 2012 but the company took a mighty leap earlier this month signing a deal with UK cable and pay-TV operator Virgin Media to offer Netflix on its TiVo service. This week Netflix opened its doors, so to speak, in the Netherlands.

“It’s a huge win for Netflix,” said Wedbush Securities analyst Michael Pachter, quoted by Bloomberg (September 9). “Cable sees Netflix as a possible problem for them, an alternative to cable. This is an acknowledgement by Virgin that its customers want that type of service as well.” Liberty Global, cable giant and the biggest broadband operator in the world, acquired Virgin Media earlier this year.

HBO was a rather undistinguished cable TV platform before venturing into original production. Its “Larry Sanders Show” won an Emmy Award for best comedy in 1998, the first for a cable network. The following year HBO offered “The Sopranos,” which became a worldwide hit, won several Emmy Awards during its six-year run and, arguably, changed American television. And when American television changes, the world watches.

“And the audience has spoken,” said “House of Cards” lead actor Kevin Spacey at the 2013 Guardian Edinburgh International Television Festival. “They want stories. They're dying for them. They are rooting for us to give them the right thing. And they will talk about it, binge on it, carry it with them on the bus and to the hairdresser, force it on their friends, tweet, blog, Facebook, make fan pages, engage with it with a passion and an intimacy that a blockbuster movie could only dream of. All we have to do is give it to them.”

Viewer attraction to Netflix, its video on demand competitors and the renewal of high quality content notwithstanding, there’s still a business model to consider. Netflix, not unlike HBO in earlier times, sustains itself with library content, rights to which have come at a reasonable price. That may change in the US if TV and film producer 21st Century Fox sells back-catalogue exclusively to cable operator Comcast as suggested by the Wall Street Journal (September 20).

“Netflix needs to become more reliant on original programming quicker than anyone might have realized because the licensed library content on which the service built its popularity could erode,” offered Variety’s digital editor-in-chief Andrew Wallenstein  (September 24). Obviously, the biggest of the big producers, distributors, broadcasters and telecoms are taking a long hard look at opportunities with video on demand. Some will pay dearly to keep the door open as others will pay to close it.

See also in ftm Knowledge

Media Business Models Emerging

After a rough transition media business models are emerging. Challenges remain. There are Web models, mobile models, free models, pay models and a few newer models. It makes for exciting times. This ftm Knowledge file examines emerging business models and the speed-of-light changes. 137 pages PDF (January 2013)

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