TV, The Internet and the Future of Video(Part 1)

15 Apr

Recently I began consulting at a media/cable/advertising firm trying to introduce new technology into the way we consume traditional TV and TV ads. In my discussions with friends I’ve realized that most people don’t understand many of the business or technological constraints revolving around video. I’ve decided that I would explore some of the basic ideas here and look at what i believe will change in the future.

The Basic Economics

In Cable TV there are four essential parties in a business relationship with one another that allows you to get your weekly allowance of Lost or Gossip Girl. The advertiser (Ford/Coca Cola) , the programming network (Cable:TNT, TBS Broadcast Networks: ABC), the cable operator (Comcast, Cox , Time Warner) and the Consumer (You).

The advertiser buys time during the TV shows you watch in the hopes that any ads seen by viewers will make them buy more of their products, or pay more for their products. Generally the price they pay the networks is related to the number of people the ad will be seen by as well as the type of audience. Younger is generally better than old, and higher income better than low. For any company TV’s appeal is the ability to reach a mass audience. There are approximately 114million TV households in the United States. Few other mediums have the opportunity to reach nearly the entire population of the country.

The programming networks are the guys responsible for creating all the shows us consumers spend their evenings in front of the screen watching. They’re responsible for the reality shows, the dramas and even broadcasting sporting events. Programmers make money in two ways, the first as stated above is by selling advertising. The more popular (I’m not sure popular shows are always better shows), the more they can charge for all the 30 second ads shown during. The second are through something called affiliate fees which is what your local cable operator must pay the network to be allowed to broadcast it. (Sometimes if you pull up the financials of a public programming company, this will fall under ‘distribution revenue’) Networks generally charge some dollar amount per subscriber to the cable operator. The programmers with more popular content generally get away with charging more per person. More on this later.

Cable Operators are in the business of delivering video and nowadays data. After spending millions if not billions of dollars to put wire and fiber into the ground in your neighborhood, Time Warner sells you access to their networks so you can enjoy your TV.  Their primary concerns are the number of subscribers as well as how much each subscriber pays (ARPU: Average Revenue Per User). The more services you sign up for the more the cable company makes. And since a huge amount of the costs were part of actually building the system rather that to pay for operating the service, they’re hoping you max out as much as possible.

The Consumer: If you’re like me you’re just hoping theres something good on TV. You pay the local cable guys a monthly fee so you can watch the shows, maybe see an ad for a car you’re going to buy and if you’re really splurging pay for a cable modem so you have broadband access.

For a very long time the relationships between these four parties were pretty good. Recently however the family of four is finding itself more unhappy with one another. We’ll take a look at why.


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