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Billy Deitch

Originally from the not-so-mean streets of suburban Detroit, Billy spent six years on the East Coast before recently moving to San Francisco, where he works in growth equity investing. He graduated from Yale University in 2007.

Michael Rucker

Michael currently resides in Tokyo where is he launching, marketing and growing Google's advertising solutions in the Asia Pacific region. Born and raised on the west coast, Michael made a brief stint on the east coast, where he attended Yale University.
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Media

Bundled Content is So 1999

By Michael Rucker, on March 15th, 2010

monitorsA RESPONSE: A week ago, a friend of mine wrote an article about Why Hulu Should Charge By The Month. I need to preface this piece by stating that I have a ton of respect for the author, and over the past several months he and I have discussed various topics like IPTV and digital media distribution. So when I saw that he decided to write an article about the debates around HULU’s business model I was super excited that he put his pen to paper…or I should say…his finger tips to the keyboard.Why then am I choosing to write my first contribution to NBV as a response to his piece, rather than simply leaving a short comment on his article you might ask? Don’t worry, I don’t have it in for Will — he is still a dear friend. Instead, I hope that the argument I put forth will act as a foundation and launching pad for healthy discussion and debate among the contributors to NBV’s Media section.

I am not much of a polished writer, but I have heard the phrase don’t bury your lead several times. So now that I am already into my second paragraph, I should just get to the point…when it comes to media and technology, Open Systems Will Win, and the argument that HULU should charge by the month and bundle content is so 1999. As we enter into a new decade (wow time flies), we need to understand that open systems create more innovation and freedom of choice for consumers. The idea that HULU should resort to old media business models is simply more of the same, more of what we have gotten from traditional media outlets. If HULU resorts to the same business model that News Corp and NBC Universal already use when distributing this same content onto your television set, than what is the point of HULU? It is simply another distribution outlet controlled by the same conglomerates that are unwilling to innovate and experiment with what the internet can provide. It truly is just television…online.

I don’t blame Will or the executives at HULU. Like most good men stuck behind a desk, wearing a shirt and tie to work everyday, they have fallen victim to conventional and traditional business models. MBA programs teach their students to generate sustainable competitive advantages by creating closed systems, making them popular, and then milking the customer through the life cycle of the relationship. Lock in the customers to lock out competitors. And no business does this better than the cable television industry. No matter how much I hate Time Warner Cable, no matter how terrible their customer service is I am locked into their closed system. What are my options? Well, I could have a person over to my house to install an ugly satellite dish on my roof and save 5 bucks a month…no thanks. Even if I were to make the switch to DirectTV I am still going to be forced to pay for a bundle of content of which I consume maybe 5-10%. So excuse me for a second if I don’t care about what sort of pricing strategy will sustain the cable companies business and competitive advantage.

Unlike the cable companies, I will give Will some credit. He roots his argument in the benefits that bundling currently provides consumers. However, I can’t help but think that these arguments are simply a way of justifying and sustaining an inefficient business model. I can’t help but think that this closed model is stifling innovation and that in the long term, the potential of a more open model that provides choice and flexibility would undoubtedly result in a vibrant, profitable, and competitive ecosystem for media companies.

Subscriber Revenue

Who the hell needs 200 channels?!? I watch a handful, and I would pay a premium for each! If ESPN wanted to charge me $12 dollars just for their channel in order to maintain revenues than so be it. I would pay it. If Spike TV goes out of business because it is no longer being subsidized than…so be it. The good content will find its way to the channels that have viewers. $12 x 3 channels I want is a lot less than the $50 or more than I currently pay.

Advertising Revenue

Once again, if Project Runway gets less ad revenue since Will is not watching anymore than in my opinion this is a good thing. 1) Will already has terrific fashion sense and should be spending his hour thinking about the next article he wants to write for NBV 2) Brands and advertisers are not wasting impressions on a customer they are not trying to reach in the first place. In this way, advertising will become more targeted and more effective, and their will be a premium that could potentially make up for the loss of scope and reach.

Promotional Spending

To use HBO as an example of media bundling is a falty argument. If anything, HBO should be hailed as a media company that has done it right. They have produced quality content that people want. They have created that demand and have increased their revenues by taking advantage of every access point (subscriptions, home entertainment, digital rentals). Their willingness to break the mold has resulted in amazing content, excited consumers and a healthy business model.

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  • judiecalvert
    Is there some analogy here with the type of merchandising many department stores have gone to? -- Bloomingdales seems to have become a mini-mall of newer designers. At the Mall of America site out here in Fly Over Country, Bloomies leads with designer mini boutiques located right inside the entrance. To me, this is like Hulu vs. Cable --enticing you in with a little taste of something you want but you don't have to venture a lot further in (which is always scary at Bloomies with their maze like store design). I don't want to buy the whole thing -- just a little taste.
    I don't want to pay for cable -- just give me a taste of Psycho when I want to see sunny green Santa Barbara.
    I like that author Will too -- I have known him a very long time -- and he does have a terrific fashion sense. Maybe he ventures far into the depths of Bloomingdales.
  • First of all, Billy and Kirk’s responses here (http://www.newbizviews.com/2010/03/08/why-hulu-should-charge-by-the-month/) are great so I definitely suggest you check them out.

    (At the risk of sounding like a total apologist for cable TV, which I am in no way trying to be, here goes)…

    Rucker, thanks for the spirited response… But I still disagree. I think I should start from the bottom of your response and work my way up towards your main point that Open Systems Will Win.

    Promotional Spending: My point about promotional spending was not that HBO is not a good network, or even that HBO is an example of bundled content. Quite the opposite, it’s a great network, and I can’t wait to get The Pacific on DVD after hearing recommendations like this (http://www.jackmyers.com/commentary/media-business-bloggers/87644242.html). But if every network had to spend on promotions and advertising the way HBO does, television consumers would end up paying a lot more for the shows they watch. Those advertising budgets have to be funded somehow.

    Advertising Revenue: You have a point that the cost per impression on television might increase with a more focused audience, but I don’t think that increase will make up for the value of lost casual viewers. For example – with simple numbers – if a show had 100,000 viewers before the dissolution of the bundle and priced its advertising at $10 per thousand, that show made $1.0mm in the bundle system, per advertisement. If the bundle is dissolved and suddenly the viewership drops by half to 50,000, then pricing will have to rise by 100%(!) to $20 per thousand to make the same amount of revenue. The only way you could convince an advertiser that this is an acceptable new pricing arrangement is if you argued that the 50,000 casual viewers who slipped away HAD NO VALUE. I don’t think that advertisers will buy that - even people way outside your target market strike zone have some value. Forcing these people out of the system by requiring they subscribe to each channel individually destroys value for the system as a whole.

    Subscriber Revenue: True, you might end up paying less for television if you settled for 3 channels priced at $12. But what kind of world would that be?? Three channels, come on! Which brings me to your final point:

    Open Systems Will Win, Honestly I’m not exactly sure I get this, especially as it relates to television… Do you mean that there should be no subscription-based television? Does that mean that mainstream networks will crumble and dissolve into things like Will Ferrell’s Funny or Die and YouTube? If so, I’m preparing to shorten my attention span even further, considering that the longest video available will be 3mins and 15secs and usually stall at least once while downloading…

    My point is that claiming Open Systems Will Win sounds good, but the fact of the matter is that content longer than 3mins is expensive to create and requires a viable business model to support it. I just don’t understand how the system you describe provides that.

    At the end of the day, people have voted with their feet (or eyeballs in this case!), and cable TV has won a dramatic amount of market share (http://tvbythenumbers.com/2008/12/03/updated-where-did-the-primetime-broadcast-audience-go/9079) from free-to-air broadcast TV (is that an “open system”) over the last 25 years. People have migrated to cable because the breadth and quality of programming is simply superior to broadcast options. As more and more people are converted into cable subscribers, more money is paid into the system and better content is created.

    Arguing that we should destroy the cable bundle and start buying TV shows a la carte or even completely switch to user-generated, advertiser-support content sounds a lot like a classic example of The Tyranny of Small Decisions (http://en.wikipedia.org/wiki/Tyranny_of_small_decisions). We may all rationally choose to spend a little less each month on television, but one day we will all look over our collective shoulder and realize that we no longer have the option to enjoy new and daring high quality content. Sure we’ll have the occasional awesome 3mins music video. And we may we even get a handful of longer dramas, comedies and reality TV shows that appeal to the broadest possible audience (while taking the least amount of risks). But we won’t have the wide menu of content currently available through cable television. So if you’ll excuse me, I have to go program my DVR to record all the re-runs of the The Daily Show, Mad Men, The Jersey Shore Psych and South Park before it’s too late!
  • Jared McKiernan
    This comment touches on a few issues I see with the current advertising-based model of supporting content delivery. While I must first disclose that I am a believer in the Open Systems Will Win mantra, until those systems eventually reach the point where they have won...some closed system is raking in cash in the interim. Right now, it seems that system is Cable TV. Here in my particular area of Chicago (logan square), most homes have one option: Comcast. It's Comcastic! If you are facing a certain direction at least, I think Dish/DirectTV might be feasible although they don't reach all streets last time I checked out the TV-situation here. I rarely watch the TV, and my roommates don't watch much either- if we really wished to go fully online for TV i would only notice in the difficulty i'd have finding MLB/NHL local games online which are not blacked out due to other rules enforced by the closed system providers and their legacy contracts which were signed to pay for league rights (Fox's MLB blackout rules are particularly archaic and senseless).

    The ever-expanding cable channel universe, and the corresponding level of what passes as legitimate TV content for a channel to provide, seems to me like it is a) unsustainable b) absurd.
    We pay more for additional choices which each are qualitatively worse? Where do i sign up!
    While I watch mainly CSN/NHL network/MLB network, which are all channels which broadcast niche events with fairly good quality of coverage, these channels are all owned by pro sports leagues or teams and serve as extended ads to drive interest for the tickets...the Blackhawks are a great example of this, as they prevented home games from being shown for years, and when the team began showing all games on CSN the fan following began to spend explosively on tickets (winning helps...but winning on TV is the unstoppable combo)

    When I watch the NHL network, it is clear: their ads don't cost much. And are horribly targeted. One particularly egregious example is an ASPCA spot about saving pathetic puppies by joining their organization, and they push some deathly looking skeletal dogs right into your face out of nowhere. Why they think NHL network viewers are particularly likely to join a PETA-ish organization doesn't add up to me, but i assume it is just the cheapest place to buy time. Debt settlement short infomercial type ads run frequently, and basically nothing shown except NHL/hockey-related ads could possibly be making any profit through their ads on these channels. It is just impossible (unless a large subset of easily manipulated dog-loving latenight hockey watching fans exists...)

    Moving onto more "mainstream" channels, I notice a few things about the ads as an infrequent viewer:
    1. There are an inordinate number of car ads on tv.
    2. It is extremely rare that anything is marketed towards me. Some notable exceptions off the top of my head being Taco Bell, HTC phones, Hot Tub Time Machine, and the Snuggie. (I hate being talked down to by advertising, although I know this works as a lowest common denominator technique where people feel bad so they try to remedy this by acquiring the product. etc. etc.)
    3. CNN has a massive amount of drug-marketing spots along with not-so-subtle propaganda pushing the brand names into your head before you even know if this is better than what you were already taking, or if it is just way more expensive. Lipitor being the #1 example right now.
    4. Why do B2B companies like IBM advertise during prime-time TV? This makes no sense to me. If a business leader is making their enterprise development decisions based on whom they heard about during their nightly Kevin James sitcom zone-out, rather than any actual knowledge or research of the merits of various competitors which takes about an hour tops online...well, I'd like to know that they might not exactly be the best person to lead that particular business.
  • Jared McKiernan
    Sorry, brevity is not my strong suit...couple other points to wrap up my post-

    TV ad dollars are increasingly less and less valuable. Is the budget allocated into TV ads shrinking along with it? I don't think this is really the case; instead Google and other online ad methods are merely added to the high-cost TV/print/billboard campaigns. Yet no one is really proving positive ROI from the dollars invested in these traditional campaigns each year to begin with! It is an arms race of sorts, where competitors can't retract spending for fear of relinquishing market share. Clear signs of another bubble.
    When will it start to burst? (or has it already with the unwinding of print journalism?? perhaps.")

    My general view is that if something advertises a lot, it is less likely to be a good product. Advertising substitutes for quality and word-of-mouth evangelism of your business.

    Dave mentions "content"...but this makes me wonder- what content do people even want?
    If they want the best, why do they buy so much terrible quality content? Only smart people know what they want, the masses tend to do whatever they are told by one group or another.
    Why?
  • Dave Miller
    People need options. The best content will rise to the top and people will pay a price for it because they want to be entertained. That price may turn out to be a monthly subscription, or it may be six extra minutes of content in the form of advertisements. Bottom line, when people know what they want and where to find it, they're willing to incur cost to consume it. Top content on open systems will win out, but the outlets should start building payment options into their models unless they want their users to jump ship the first chance they get.
  • Aaron Weissman
    Great article Ruckstar.
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