FEATURE: I have to admit it: I am a media-bundling convert. It wasn’t easy to say but it was an important transition for me. So when listening to the debate around Hulu’s pending addition of fees, I have come to support one solution: a simple monthly fee. As crazy as it sounds, I would ask that Hulu / News Corp / Disney / Providence / NBC (maybe Comcast by the time this is published) charge consumers by the month for unlimited access to content when they introduce fees. But perhaps I’m getting ahead of myself. Maybe I should explain what I mean by media-bundling, and how I came to this conclusion.
Media-bundling is a fairly simple idea. Media (music, television, print, etc.) can be sold on an a-la-carte basis (think single song sales from iTunes) or in a bundle (think newspapers, music albums and cable television). The bundle will include the content you want, some content you didn’t know you wanted but enjoy and a lot of stuff you’ll never use (i.e. those announcements for local nuptials in the back of every newspaper). In the a-la-carte selection, you get what you pay for, no more, no less.
Due to the growth of internet distribution and services like the aforementioned iTunes, the music album bundle is pretty much toast . The same mechanics of internet distribution are destroying the business models of newspapers across the country. Television, particularly cable television, however, is one of the last bastions of media bundling. You can’t buy just ESPN, CNN or MTV; you have to buy the entire basic cable selection. And I hope Hulu (as a representative of the future of television consumption) keeps it that way.
So how did I come to love the bundle? Well, as with most revelations, it started with column from The New York Times – this time one by Joe Nocera from 2007. He suggests that destroying the cable television bundle will increase consumer costs. His argument is pretty important, so I’ll go through it quickly and then get back to Hulu.
Subscriber Revenue
Cable networks receive payments from the Comcasts of the world on a per subscriber basis. This provides crucial recurring revenue to the networks and gives the carriers content, but that delicate balance would be upset with the dissolution of the cable television bundle. According to Nocera:
“Take, for instance, ESPN, which charges the highest amount of any cable network: $3 per subscriber per month. (I’m borrowing this example from a recent research note by Craig Moffett, the Sanford C. Bernstein cable analyst.) Suppose in an à la carte world, 25 percent of the nation’s cable subscribers take ESPN. If that were the case, the network would have to charge each subscriber not $3, but $12 a month to keep its revenue the same.”
As he points out elsewhere, this would, however, mean that lower consumption subscribers would save money. Higher consumption subscribers, seeking broad selection, would most likely either face higher prices or settle for a reduced number of channels. Neither alternative for high consumption subscribers would be ideal.
Advertising Revenue
Lower network subscription in an a-la-carte world would have a disastrous effect on another key component of network revenues – advertising. As people subscribe to fewer networks they necessarily start to consume less television. The episode of Project Runway I “accidentally” tuned into for a full sixty minutes last week – gone. My inexplicable habit of randomly catching I Love the 90s whenever it is on – no more. I probably wouldn’t pony up for Lifetime or Vh1, so my viewership would no longer add to the ratings of those two shows that I “casually” watch. This decline in ratings will put a significant amount of pressure on advertising revenue at the networks. The pricing per impression might increase with a more focused audience, but it will certainly not make up for the loss of scope.
Promotional Spending
Have you ever wondered why you see HBO ads on billboards, bus stops and subway cars, but you rarely see an ad for ESPN or the Discovery channel? It’s because the latter channels are part of the basic cable bundle and therefore don’t need to advertise. HBO, on the other hand, has to pay advertisers to convince you to subscribe, which in turn increases the cost of HBO. If the current cable bundle were dissolved all networks would have to behave this way, adding another cost that would trickle its way down to the consumer.
The Bundle and the Freedom to Create
I think that Nocera’s argument so far is sufficient to accept the bundle, but I will add one more benefit of the cable television bundle: it sustains overall creativity. In an a-la-carte world, each show and network would have to convince the audience of its value or risk being de-subscribed and bankrupted. So ask yourself, would Bravo have ever emerged from its indie roots to produce entertaining but less highbrow content like Top Chef? Would AMC have been around long enough to produce Mad Men? Would any network go out on a limb to develop smart or innovative content given the cost and downside risk?
Good content is often expensive to create and high-risk. The highest quality shows are not always immediately embraced in terms of ratings (see: Arrested Development). Being part of a media bundle, however, gives networks a steady stream of revenue and the ability to take risks and pursue innovation. If people feel as though they are over-paying for cable, they are probably right. But what they are paying for in addition to the content they consume now is the option to enjoy quality content at some point in the future. Encouraging the creation of future diverse and high-quality content is perhaps the greatest externality that the bundle provides.
There are some real problems, however, with Hulu adopting a subscription-based service. Foremost among them is the fact that most people watch Hulu on small computer screens, not on their living room televisions. This decreases the likelihood that people will pull the plug on their cable contract with Comcast and replace it with an expensive Hulu subscription. This might lead some to favor an a-la-carte based service to produce near-term revenue, but that would be a mistake. Music and print have shown that controlling media distribution is key to long-term profitability and simplying because you can distribute content on an a-la-carte basis does not mean that you should. The technology linking televisions with the internet (Apple TV, Xbox, etc.) will inevitably become widely adopted if the content offering on the web is compelling and cost-effective.
As more of our television consumption moves online, the distribution decisions by companies like Hulu and others will become of increasing importance. I for one hope they embrace the bundle.
