Josh Luger

Inside Andrew Sullivan's Attempt To Turn The Digital Media Business Model On Its Head

theballfiles — Tue, 02 Apr 2013 14:26:00 -0400

This January, noted blogger Andrew Sullivan left his perch at The Daily Beast to embark upon a highly visible and seemingly risky enterprise. He took his blog, The Dish, independent and decided to test whether it was possible for the operation to sustain itself entirely through a subscription-based revenue model.

Sullivan initially set a revenue goal of $900,000 a year to maintain the standard of the blog. He specifically set out to reach his revenue goal without the help of any advertising revenue, saying “it provides a vital revenue stream for almost all media products. But we know from your emails how distracting and intrusive it can be; and how it often slows down the page painfully.”

Sullivan also declined to take any venture capital. He threw himself entirely at the mercy of his loyal and sizable readership, outlining the core principle: “we want to create a place where readers – and readers alone – sustain the site.” He asked readers to sign up for annual subscription that costs a minimum of $19.99, and gave the readers the choice of paying more if they wanted.

The Dish’s financial performance is being closely watched, as is every high-profile effort to monetize digital content these days. Luckily, for those interested, Sullivan has made the performance of his paywall entirely transparent.

So, how’s he doing? Well, Sullivan got off to a booming start. He raised over $333,000 from 12,000 subscribers in the first 24 hours his new blog went live, leaving him “gobsmacked.”

While subscriptions have continued to come in, the initial burst has gradually turned into a more consistent trickle (or as Sullivan puts it, they’ve “flat-lined.”) As of March 12th, The Dish had collected over $660,000 from nearly 25,000 subscribers. Sullivan has both tightened the meter and introduced a new monthly subscription option (a $1.99 “app-like fee”) in an effort to bump subscriptions in the last few weeks.

A few months in, it’s very clear that when it comes to the viability of Sullivan’s experiment, things are still very unclear. So, I decided to sit down with Sullivan to get his take on the performance of his model so far. We discussed how and why he launched the meter, analyzed what he’s learned since the launch, and talked about his future ambitions for the The Dish and digital journalism in general.

The full interview is below (all bolds are my own).

JL: You’ve been doing a lot of interviews like this recently, talking more about the business of your blog than the articles and opinions within it. Do you find yourself doing more of these than you’d like?

AS: “Yes [laughs]… but that’s really not been the main struggle. It’s been incredibly grueling because we had a quick period of time to completely transform what we were doing. We’re all journalists, not business people. We had to figure this all out ourselves in a space of a month. We had to figure out a meter, how to set up a company, how to set up an LLC. At the same time you’re writing every day and trying in a very competitive marketplace, and asking people for money, to put out the best editorial content you can.

When I was at other media institutions, I didn’t have to worry about this stuff. At the same time, it’s very hard for what we ended up doing to be integrated into something larger. It became more itself, until it eventually made no sense.

JL: So, what was the impetus for leaving The Daily Beast?

AS: Well, the contract was up and we had to figure out what to do. And it’s interesting. Each time we’ve [entered into an agreement with a larger media company] over the last 13 years, the media landscape has changed completely. You make a deal for two years and the assumptions you made completely changed.

Editorially and organically it felt like it was itself. And the advertising and CPM-based model was clearly softening. The concept that you could support online journalism like you could print journalism with ads… began to disappear. So, the only revenue we had [at The Daily Beast], I thought, wasn’t going to go anywhere. I sure as hell wasn’t going to gamble with sponsored content. I couldn’t do that.

JL: How did the decision to take The Dish independent with a meter come about then?

AS: We had a blue-sky sit down dinner [and we asked ourselves]: “What are we trying to do with this? Where we asked what are we trying to get from this? What’s the value in it for us?” And then we went to a discussion of revenues.

What’s the most valuable thing we had to sell? It was the connection we’ve had with a readership that’s been with us for a long time. It’s an incredible bond. Most big websites are trying to trap the migrating flocks of Internet readers, and some are figuring out how to do that technologically better than others. But that was never going to work for us. That’s not what we were.

So, we thought of the subscription idea, the meter idea…. Because we had no clue whatsoever what the response would be, we decided to start and see if we can do it with that alone.

BI: How do you wrap your head around the meter concept?

AS: Back in the day I would go to the Harvard Square bookstore. When I was there in 1984, having left England, there was no way for me to know what was going on back home except in the British papers. I would go there and flip through the newspapers. At some point the dude had every right to say “Either buy the magazine or put it down.” That’s basically what the meter is. At some point, the store owner says to you “Thanks for coming in, but either buy something, or leave.”

JL: What were some of the other key decisions you made at launch?

There were a couple of eight-minute decisions. Literally the night before, I said “Why don’t we leave the $19.99 field blank so they can have an option of paying what they want?” That has earned us an extra $100,000 so far.

Another decision was to be totally transparent. Lets show our readership exactly how much we’ve got and continue. So if we have to make tweaks, like we just did, [they’ll understand why].

JL: How do you feel about your new job responsibilities, being responsible for both editorial and business considerations for the first time?

AS: I never wanted to be a businessman. I tried to avoid it. But, whether I liked it or not, it’s a business. Either someone else was going to get the profits, or I was. Also, the people working with me deserve a share in the profit, which is why two people [Executive Editors Patrick Appel and Chris Bodenner] with me now have equity. I wanted to incentivize that kind of work ethic.

JL: At launch, you indicated that you’d need $900,000 in annual revenue to keep The Dish afloat. That number, for better or worse, has become the barometer by which your experiment is to be deemed a success or a failure. So, I wanted to dig into that number a bit more. What exactly does it include?

AS: It’s a conservative estimate. In our first year plans, our budget, when we mapped out how much all of this would cost – suddenly providing health care for eight people, legal fees, server costs, do the Ask Andrew Anything videos, studio to rent – it all adds up. It is those costs – and then because there are three of us who do the lion share of work - aren’t on salary. We will live off of the profits if there are any.

The idea is not to get Andrew Sullivan to work for free. That’s what I’m doing right now. I’m working my guts out every day at a point in my career when I should be settled down, and I have no money coming in at all, except for my column in London. And I have to pay my rent here.

JL: Speaking of your move to New York, which you have documented in some detail, why did you decide to do it when you took The Dish independent?

I moved to New York to figure out how all this works… to discover that no one knows.

BI: Has your approach as a writer and editor changed as a result of your newfound business responsibilities?

AS: I think things have shifted a little bit. One likes to think one is above all this and say “I’m a writer, I only produce what comes from the purist of my intentions and none of this affects me.” And, it doesn’t really affect me. I’m not going to change my views on a subject because it’s more popular. I’m not going to stop writing about circumcision even though readers roll their eyes when I do. I’m not going to stop shitting on New York, simply because it’s hilarious to do so. None of that will change.

But I found that there had previously been a subtle incentive to create pageviews…. Our incentive now is to get the guy or the woman who read it today to subscribe and get the guy or woman who subscribed yesterday to re-subscribe in a year’s time. That’s what we need. We need to make the experience worth what they’re paying for it and worth renewing.

JL: And how do you go about figuring out how to do that – creating an experience worth paying for and worth renewing?

AS: What happens in this process, since the first post I put up, this medium kind of tells you where to go. You just need to listen to it. Stats help, so do reader letters…. You try things, if they work great, if not, you let it go.

Three years ago, when it wasn’t in our interest, we installed the “Read On” button and our pageviews were halved. We made a decision that the reader experience was more important than the monetization. That wasn’t such good news for Barry Diller [laughs]. But it was a wise decision to treat those people right and give them what they want.

The surprise is being there first and establishing that consistency and building that audience that’s sticky, it works online. The thing is you have to deliver every day. If you do not give them their drugs, they’re going to fucking kill you. It’s addictive.

The horrible thing is – it’s as addictive for me to produce as it is for them to consume… My social life has collapsed. It’s my blog, my husband, and Breaking Bad at this point. And that’s not good for me.

JL: So, what is the most addictive stuff for The Dish subscribers? What’s the stuff they’re paying to read?

AS: Well, for example, we found the posts where people clicked on “Read On,” hit their limit and were most likely to say “OK, I’ll subscribe” turned out to be my long pieces. And that was a surprise.

That signaled to me part of what readers of The Dish want is more of my own writing - which is truly flattering and very intimidating. But I don’t think I’d have the audience for those pieces had I not generated the other content and features that were daily.

They have also voted consistently not to have a comments section. That tells me about our readership and what they want. They’ve been guiding me.

JL: Do you feel the need to enhance your product offering now that The Dish is a subscription product? Are there other things you’d like to do now that you are independent?

AS:Of course, only a few months in, there’s a bunch of ideas I’d like to develop. I’d love to commission long-form journalism. I want to reinvent the magazine online, to have it be both what you read at work as a distraction and for fun, but in the same community of thought, commission a long-form writer to nail a 10,000-word piece on a subject that’s within our area of discourse.

When you edit a long-form magazine, part of what you focus on is what Tina Brown calls “the mix.” You want some short pieces, some long ones, some funny ones, and some serious ones. You need the reader to enter it and enjoy it at any level of focus. You want to capture the full range of experience. What magazine editing is all about is letting readers trust editors to pick something worth reading. That’s what magazine writing is all about. If we do it, we have to make sure it’s done really well.

JL: Why do you think that’s the natural move for The Dish?

AS: What emerged out of what I did as a single blogger is a very clear voice in this space. From that, we developed little magazine features – quote of the day, etc. So other people can share that sensibility and mind meld with you. That is building out a magazine from a blog. The next natural stage is to commission the long-form journalism.

Let’s say in a fantasy world we got a Steve Brill. We’ll pay him $10,000 - we’re not going to go the slave labor route… At that point, why are we not a magazine? We got everything else. Now we have the cover story. Except you don’t get it once a week in one big package stapled together, you get it whenever you want, in any format you want, and people who don’t buy it can browse it.

JL: How does this talk to who your audience is and how they consume The Dish?

AS: We have not conquered the weekend. We are a workplace product. We exist for bored lawyers. We are the lunchtime break. The late afternoon goofy video guys. And we intuitively follow where our readers are. I post things I want to hit at peak usage hours.

But, as we’ve grown, the lunchtime peak has become much more a plateau. You have to start from where you are, figure out the virtues of where you are, and evolve accordingly. But it’s a constant evolution.

JL: Are there other things besides long-form journalism you’d like to try?

AS: We haven’t tried too much. We never really went into TV. I just didn’t think we can do it well, I thought it was crass. In general, TV is better on TV. If we do video at some point [besides the Ask Andrew Anything], along with long-form journalism, and podcasts, we have to do it really, really well.

My goal now is to make the experience of having subscribed feel good. So it also means writing more and more stuff that’s not available to anybody else, or giving them a free podcast where everyone else has to pay.

JL: What’s stopping you from doing any of this right now?

AS: Right now we don’t have the human power to do it. Putting out 50 posts a day and have them not be stupid when there’s so much else for people to look at is not easy. It’s much harder than it looks. Three of us have worked together every day for five years now [to get where we are]. We’re very lean.

We have a little motto, from a Shepard Fairey picture of Darwin, with the phrase “very gradual change you can believe in.” We are very committed to slow evolution. But we’re having a debate now. Do we go big now? Do we wait for a year until we stabilize? Or is that actually taking a risk? Do we go for long-form journalism now? Do I give more of my savings to make the reader experience better and make them more likely to renew as well as generating some more analytical science?

The trouble is you do need a real a magazine editor to do that for us. There are limits on the human mind and body. I’ve always said if someone ever dies from blogging, I’ll be the first one. It’s a hard time turning it off because consumers never turn it off.

JL: Back to the $900,000 number. There’s a lot you want to do and cash is tight right now. Advertising dollars could help with that. However, you’ve seemed pretty dead set on making this a pure subscription play. Is there a scenario where you would consider advertising, as you could control the who, what, and how of it?

In my first post after we launched, I said I could be open to it down the road. So, I don’t think I’ve boxed myself in at all.

I just think people personally value, increasingly online, a higher signal to noise ratio and they may pay for a premium, ad-free, disruption-free process, where they don’t even have to click for an unfolded post, and instead have an infinite scroll, that experience of a completely annoyance-free community. Gutting the normal webpage of comments and ads, that’s a gamble on a certain kind of model.

What we have to prove first is that we can do what already do within a budget we can afford.

JL: And what about venture capital?

AS: I’m a little nervous about venture capital. I’ve seen too many people aim big and fall flat on their faces. The only other thing about venture capital… The Dish exists to say things other people don’t want to say and doesn’t have to ask anybody’s permission.

Whether you like it or not, even if you have the best venture capitalists, if I say or stand for something they don’t like, they’ll always be more pressure on me. More pressure than even at The Atlantic or Daily Beast. There, in my contracts I had inviolate editorial independence, much to the internal excruciation of David Bradley. There’s nothing he could do about it, nor would he try to. But [with venture capitalists], you can see how the pressure to conform would creep in.

JL: Is there a red line you won’t cross in your push to sustainability and profitability?

AS: Advertising and venture capital are perfectly possible if we have to. But, I like the idea of remaining as pure as possible. I understand at some point we’ll have to make a decision about that and our ambitions. Or, maybe not.

The line is I will not do sponsored content or native advertising. I will not blur what is advertising and what is editorial. I will always provide The Dish in an ad-free form for someone, for a core readership, at a certain price. That is forever.

I think the alternative is people seeking editing they can trust, and the only way they can trust it is because it’s transparent as possible, it corrects itself prominently when wrong, holds itself accountable, airs dissent within it, and [optimally] it relies entirely upon its readership for its survival.

JL: It seems as if your experiment is also about demonstrating an ability to sustain what you consider to be old-school journalism in an increasingly digital world. Do you think the success you’ve had, and the lessons you’ve learned so far, are transferable to other journalists or blogs? If so, how?

AS: I absolutely think it’s transferable. Tinypass is a very easy thing to put on a site, and people can pay whatever they want. It may be that it’s not your day job, but it still adds up… At this point the role of the journalist has becomes less “I am absorbing all this information for you, then figuring it out all my self and then writing it up,” and more “This dude has the right thing, I’ve read it, here’s the key parts, check it out yourself, put it up in real time.” It’s more like a disc jockey remix of current events and opinions.

JL: How much would you pay for The Dish? How much do you think its worth? I ask because it’s very conceivable that, at some point, you may need to raise subscription prices on existing subscribers to hit your desired revenue goal.

AS: [Laughs] I pay $50 to Talking Points Memo so that will tell you something… I think its worth it. I’d happily pay $50 a year and I can prove that I did. And I asked readers to do so.

I am too falsely modest to say how much I’d pay for The Dish and way too close to even understand the concept. It’s very hard for me to see The Dish as some option for me to read. I, generally speaking, hate everything I write and say its all crap. But, every now and then I go on vacation and I look at it and read it. And I go “that’s not bad, is it?” If I was a general reader and wanted to find out about the world, it’s pretty comprehensive and kind of fun.

JL: What happens if The Dish doesn’t hit the $900,000 revenue number? Is there a conceivable way where it simply ceases to exist?

AS: We can still end up surviving as long as I don’t take a salary at all. We could survive if I don’t mind losing my savings. We’ll survive, we’ll figure it out by whatever means we do. We’re going to make this work. But we’re deliberately trying to put this pure model through the ringer so that we’re forced to do other things if we need to.

Chris and Patrick are living on no salary at all and they’re in their 20’s living in Brooklyn. They need to have something in their bank accounts, and they’re working incredibly hard. Their salaries come first.

I don’t mind taking a big pay cut for a while, but not indefinitely. I do this for a living. You’re not asking anyone else to do this for free.

JL: How would you like people to think of this experiment? What should the expectations be? What is a success?

I don’t see you why you can’t see it as your neighborhood business, a Brooklyn artisanal shop that makes money but is never more than it is.

But, I’ve constantly underestimated this blog and what it will make me do.

How The $7 Billion Dodgers TV Deal Could Actually Be Good For Consumers

theballfiles — Mon, 04 Feb 2013 16:50:00 -0500

Last week, the Los Angeles Dodgers announced a new television contract with Time Warner Cable (TWC), valued between $7 billion to $8 billion, which calls for the creation of a new “SportsNet LA” channel that will be the exclusive home of everything Dodgers.

The deal is simple: the Dodgers have to play baseball and collect the $7 billion or $8 billion TWC will pay them over the life of the 25-year agreement. TWC owns the programming, must produce the channel, and get it carried (and paid for) on other cable and satellite systems in the DMA.

The deal was met with smiles from the new ownership group that purchased the team just last year for a record $2.15 billion.

However, it was met with almost universal outrage and disgust by everyone else. The Los Angeles Times exclaimed that “rising sports programming costs could have consumers crying foul.” Industry analysts labeled the deal a “game changer,” “essentially a high tax on a lot of households,” and “for some, the straw that breaks the camel’s back.” Consumers, such as Vincent Castellanos, 51, a fashion stylist who lives inLos Feliz, were quoted as complaining “I’ve never once gone to a single sports channel. I wasn’t even aware I was paying for it.”

This kind of outrage is expected, easy to understand, and on the face of it, entirely logical.

But, a deeper analysis of the deal shows that it may also be short-sighted and incomplete. Over the long-term, this deal could actually save pay-TV consumers a whole lot of money.

The pay-TV industry is booming

To analyze the deal, we must first understand the broader dynamics surrounding the pay-TV industry.

To start, let’s lay down the basics:

Consumers are watching more TV now than they were a few years ago: We are more connected than we’ve ever been. The quality and selection of screens and devices have never been better. As a result, Americans are spending a staggering 34 hours per week in front of a TV set.
There are more pay-TV consumers now than there were a few years ago: In 1990, there roughly 52 million pay-TV subscribers in the US. In 2000, this number had climbed to 67 million. Today, that number is nearly 105 million.
Consumers are paying more for TV now than they were a few years ago: The average monthly cable is now $86, more than double the $40 average in 2001.

The industry has responded to increased demand with increased supply. Programmers have aggressively expanded their pay-TV footprint over the last few years, constantly creating new channels and spending more on original content than ever before.

Taking advantage of the basic concept of the “bundle” - packaging many channels together for one simple price - programmers and distributors alike have made record amounts. Cable industry revenue has nearly quadrupled since 1996, rising from $27 billion to nearly $100 billion by the end of 2011. In the last five years alone, industry revenue is up by more than 30%.

The pay-TV industry, quite simply, is booming.

But, price has become a problem

Nearly 70% of annual industry revenues, or roughly $70 billion, comes directly from consumers via subscription fees. This is the amount each consumer must pay for each of their channels every month. Programmers increasingly ask for higher fees and go to great lengths to get them. They bundle their own programming together (i.e. Walt Disney Co. makes TWC pay for ESPN channels, ABC, and Disney channels all at once) during negotiations to maximized leverage. And lately, they are requiring that more of their channels be placed on the basic subscription tier.

Pay-TV providers fight the increases as much as they can. But they’re distributors. They need content. And so they ultimately pay for it. To protect their profit margins, providers simply pass along these costs along to consumers.

This has caused massive inflationary pressure on the costs of a pay-TV subscription. The average price of a subscription has not only doubled since 2001 - it’s projected to skyrocket to a whopping $200 by 2020!

In the industry’s earlier days, this kind of inflationary pressure was acceptable and could be absorbed by consumers. Today’s might not be. Providers have to sell a product directly to consumers, and the more expensive their product is, the more attractive cord-cutting or cord-nevering becomes.

Price, therefore, is starting to become an issue that pay-TV providers need to combat in a serious way.

It’s not the only one

Consumer preferences and behavior are evolving:

Consumers are watching lots of TV but… After years of growth, traditional TV viewing has seemingly flatlined, while the use of other screens is exploding. Americans also spent close to five hours a week on a computer screen, using the Internet and watching video content, a number that is increasing rapidly. The traditional TV set- the only screen that distributors actually control - is losing its share as a percentage of the overall viewing time.
And a lot of consumers are paying for TV but… After years of growth, 1.5 millions households cut the cord in the U.S. in 2011. And 30% of Netflix subscribers ages 17-24 in 2010 said they didn’t have any pay-TV subscription. It looks as if subscriber growth has peaked.

As a result, there is an increasing nervousness among pay-TV executives about being the owner of a single-screen in an increasingly multi-screen world. This concerns represent a real long-term risk that providers are trying to mitigate.

Pay-TV providers as programmers

In other words, the greatest threats to pay-TV providers is a sense of powerlessness over the two key components of their business: price and distribution.

So, amidst the evolution of cable prices and consumer consumption, what’s a pay-TV provider to do? Buy some control.

More specifically, they’ve decided that to best guarantee their relevance as a distributor in the long-term, they need to become more like a programmer in the short-term.

Why? Because being a programmer generally means two things: control over the distribution and pricing of content.

Enter sports programming

Sports programming is exclusive, original, and live. It forces consumers to tune-in at a specific time in a world where they are doing so less and less. Leagues have established brand equity and built-in promotional power. Teams have large and devoted fan bases that watch each of the many games religiously. When it comes to programming, sports is simply top shelf.

Consequently, sports programming is also the most expensive. By some estimates, half of an average cable bill goes to sports related subscriber fees.

Here’s why:

Lots of new national sports channels: All together, there are close to 30 national cable networks devoted to sports. Each of the four broadcast networks and each of the four major professional sports leagues now has their own cable channel.
Higher costs for this programming: The most recent national sports deals all resulted in massive increases in rights fees. The NFL recently received 63% and 73% increases in separate rights deals (totaling over $40 billion), and both MLB and the NHL more than doubled their take in recent deals.
Lots of new local sports channels: Regional Sports Channels, or RSNs, are a new phenomena. Teams own their local programming rights and are increasingly deciding to start their own channels. There are now over 20 RSNs nationally. In the Los Angeles DMA alone, there will now be seven RSNs in 2014.
Higher costs for this programming: In the last year, TWC created two new sports channels as part of a $3 billion deal with the Los Angeles Lakers, Fox acquired a 49% stake in the New York Yankees’ YES Network that values the channel at some $3 billion, and Fox renewed its deal with the Angels for $3 billion over 20 years. All Los Angelites may soon be paying upwards of $20 a month just for local sports programming (see graph above).

With TWC looking for control over distribution and price, there’s nothing better than control over sports programming - the most premium and expensive content there is.

So, while there is a cash incentive for TWC in the deal…

TWC will get a good initial return on:

Subscription revenue: The Los Angeles DMA has roughly 5.6 million TV-viewing households. TWC will immediately seek to pass along a $5 a month subscriber fee to each and every one of them. That comes out to approximately to $336m a year – or $56 million more than they’re slated to pay the Dodgers.
Advertising revenue: TWC will reportedly have the exclusive rights to sell advertising on SportsNet LA.

Their other core objectives could result in long-term gain for consumers

Consumers can expect higher cable costs in the immediate term. And yes, it sucks to pay for any channels you don’t watch, let alone expensive ones.

But consumers were already paying for lots of channels they didn’t watch before. That’s the price you pay when you choose to buy in a bundle. The only difference is that now they’re beginning to feel that they pay too much for channels they don’t watch. And that is one of the primary reasons why TWC stepped in here.

Over the long-term, consumers could benefit from the deal because TWC will have:

Incentives that are aligned with the consumer: TWC’s #1 goal is the same as their consumers - to keep the price of the bundle down. The more they have the ability to achieve that, the better off the consumer will be in the long-term.
More leverage with programmers: The more TWC pays for and owns its own premium content, the less they have to spend and less they need to buy others’. This gives them even more incentive and ability to keep prices for other programming down.
Ability to cut out a middleman: Without a programmer such as Fox in the middle, there’s simply one less hand in the cookie jar, one less company that needs to turn a profit.
Long-term cost control: Programming deals typically run 10 years, at a maximum. When they expire, the massive fee increases detailed above usually kick in. TWC was able to lock in rights for 25 years, which will allow them to keep fees constant for the duration of the agreement if they choose.

On the other hand, if a programmer like Fox had won the Dodgers rights for $6 billion, they would have:

Immediately sought rate increases at least as high the one that will be coming down the pike
Used Dodgers’ programming as leverage to get more from TWC for other programming they own by bundling them into one negotiation
Likely entered into a 10-year agreement (meaning a significant bump could be expected when the deal is up)

So, as ironic as it may be, the $7 billion dollar deal with pay-TV provider TWC could very well be preferable for consumers in the long-term. They should want the company whose goal is to keep the size of the pie down to have control over the ingredients - not the programmers who only care about getting a bigger piece of the pie for themselves.

Who should consumers really be angry at?

Themselves! Consumers allow the bundle to exist in the first place by paying for lots of stuff they don’t consume. The only reason programmers and distributors can pass down an increasing amount of mandatory and ancillary costs via a bundle is because the market allows for it (i.e. consumers keep paying for it)!

We live in an age of massive technological upheaval, where consumers are increasingly exerting more control over how and what they consume, and over how much they pay to consume it. Opposition to bundles in principal may grow over time, and bundles may become untenable at any cost. If and when that day comes, TWC will definitely not be a consumer’s friend.

But, as of today, we’re still a nation of bundlers. While we are, it’s best to have someone fully incentivized to keep the bundle reasonable and affordable with as much control over programming as possible.

As odd as it may seem on the heals of this massive local TV rights deal, TWC might just be the best friend a pay-TV consumer has at the moment. And it always helps to have friends in high places.

Why The Entire TV Industry Will Be Watching Netflix's 'House Of Cards' Gamble

theballfiles — Tue, 22 Jan 2013 15:58:00 -0500

Netflix is set to enter the original content space in a big way with the release of House of Cards, a long-anticipated original series featuring Kevin Spacey as Rep. Frank Underwood, a ruthless politician with his eye on the top job in Washington.

The entire first season will be available to stream beginning tomorrow.

Netflix won the rights nearly two years ago, outbidding the likes of HBO and AMC with a massive upfront commitment of $100 million for 26 episodes (or two seasons). Netflix has an exclusive two-year window on the series. After that, the show’s producers are free to take it wherever they want.

Ted Sarandos, Netflix’s content chief, argued at the time that the commitment was “n ot much of a radical departure in what we do every day,” and was based on the same methods and algorithms that Netflix uses to screen the rest of it’s content. He did add, however, that “There’s an added risk factor, in that this is the first time we’re licensing something that hasn’t been produced, or at least completed.”

That’s putting it very mildly. It’s an incredibly large deviation from how Netflix currently goes about acquiring content. It also represents only a piece of the commitment they’ve made to original content. By the end of the year, Netflix will launch a new season of Arrested Development, an old FOX cult favorite, and feature a new series by Ricky Gervais, among other new projects.

Original content, and House of Cards specifically, represents a very visible high-risk, high-reward proposition for the company.

More than that, it’s also a potential game changer for the entire pay-TV industry.

Netflix as a disruptor

In many respects, Netflix is already a very disruptive force, offering a substantial streaming package to consumers where they can watch:

Where they want: People want to be able to watch content everywhere - on TVs, laptops, smartphones, and tablets. Netflix allows for that. But pay-TV’s “TV Everywhere” initiative has been plagued by delays and infighting since its launch. The result? Only 37% of pay-TV subscribers have ever viewed TV online through a TV network’s app or website.
When they want: People like and increasingly expect to be able to consume content on their own schedule. As result, it’s becoming more challenging for programmers to drive live tune-in to non-live, evergreen content. DVRs, apps, and limited streaming options like Hulu have helped bridge this gap, but they don’t necessarily speak to…
How they want: Programmers typically release TV shows once a week, with an entire season lasting months. But many viewers increasingly prefer to watch numerous episodes of a show at once and finish seasons in weeks (if not days). If Netflix subscribers like the first episode of House of Cards, they’ll be able to instantly watch the next… and then the next. Also, there won’t have any pesky advertisements to watch, click out of, or fast-forward through.

But, content is still king

There’s one massive missing piece in Netflix’s arsenal of disruption: access to the best of what people want.

U.S. subscribers are watching an estimated 80 minutes of Netflix content every day, but it’s not uncommon for people with the service to say “I can’t find anything worth watching.” The problem is the more content subscribers consume, the more content Netflix needs to replace.

This gives programmers tremendous leverage over Netflix. As of now, here’s how it stacks up:

Netflix comes to the table with no original or exclusive high-value content, and with a single revenue stream that is entirely dependent on the acquisition of third party content
Programmers come to the table with lots of original and exclusive high-value content, an otherwise robustly profitable business with many different revenue streams, and a legitimate fear that the rise of Netflix and streaming in general poses an existential threat to their business

Without content, Netflix doesn’t have a business. Because exclusive rights to anything - especially popular TV programs - are a huge draw, programmers are increasingly deciding to either not provide them to Netflix (e.g. Showtime), or asking for prices that Netflix won’t pay (e.g. Epix).

Programmers have similar leverage over consumers as well. Pay-TV is the exclusive home to much of the most valuable video content, including live sports events and HBO. When there’s only one place to get something, people are forced to go to that once place to get it.

How House Of Cards can change everything

True “low-end disruption” occurs when the performance of a product overshoots the needs of certain customer segments, enabling a disruptive technology to enter the market and provide a product which has lower performance than the incumbent but which exceeds the requirements of certain segments (thereby gaining a foothold in the market).

Netflix’s entrance in the original content business is a massive step forward in their attempt to be a true low-end disruptor in the video content and delivery space. For the first time, they’ll:

Provide consumers with top-quality exclusive and original content that is not part of a pay-TV subscription
Couple “where,” “when,” and “how” disruption with some “what” disruption

The result? A product that unquestionably exceeds the minimum requirements of certain segments of the market. Netflix’s $8 a month price point makes it well-suited for the least profitable consumer segments. And if they continue to produce original and exclusive hits, they might be able to swim a bit more upstream.

At the same time, is the rate at which pay-TV is improving exceeding the rate at which customers can adopt the new performance? Well, a typical pay-TV subscription includes dozens of channels (many of which a given consumer will never watch) and carries an average price tag of $86 (in part from the fees charged by some of those channels the consumer never watches). So, one could argue “absolutely!” (By the way, by 2020, it’s estimated that the average cable bill will rise to a whopping $200!)

Disruption equals a win for consumers

We will likely see a mix of the following if House of Cards is a runaway success:

Better digital content: If Netflix can create a successful return on a $100 million investment in digital content, expect more high-quality, original and exclusive digital content as a result. Amazon and YouTube have lots of cash and could immediately increase the their original programming budgets. Combined with the other benefits of digital platforms, this could lead to more…
Cord cutting: Only one million pay-TV subscribers cord-cut in favor of streaming in 2011. But, if Netflix is able to truly reset our expectations of what a content provider can and should be, more consumers may start to look at it as more than complimentary. But cord cutting is nothing compared to…
Cord nevering: The greatest threat to the pay-TV ecosystem in the long run is that the market contracts because new, younger consumers never participate in it. In 2010, 30% of Netflix subscribers aged 17-24 didn’t subscribe to pay-TV. If Netflix and other digital distributors can truly disrupt from the low-end of the market, this is the segment they will target and find the most success in.

But, rumors of the death of the pay-TV industry are grossly exaggerated

The issue isn’t that the pay-TV industry can’t become more consumer friendly, it’s that they don’t want to. They’re simply incentivized to protect their status quo distribution scheme as much as possible, for as long as possible. And who can blame them? Business is good.

But, Netflix doesn’t need to fully disrupt the industry to get it to move. It only needs to convince the industry that the existing ecosystem could potentially be disrupted. Breaking the industry’s monopoly on top-quality, original, exclusive programming is a good way to do that.

This will force more competition into the marketplace. This could mean the pay-TV industry will instantly be more open to:

Making TV Everywhere more of a consumer-friendly priority now, rather than an eventual goal down the road
Allowing more digital content to be available as part of a subscription
Adding to Hulu’s product offering, rather than scaling it back
Lower cable bills as a result of pay-TV providers pushing back more aggressively against subscriber fee increases and/or insisting on smaller and more affordable basic subscriptions

Any or all of those developments would be welcome news for pay-TV subscribers.

Of course, House Of Cards could also flop

If House of Cards is an utter failure, the situation will be quite different. Netflix will be $100 million poorer, and likely be unable and unwilling to make another such bet in the near future. Moreover, the titans of the pay-TV industry will hail the failure as evidence that they were right about the supremacy of the traditional TV ecosystem. They will talk about the ecosystem’s unique ability to identify, invest in, produce, market, and create hit content properties. And it is quite possible that they could very well be right in those assertions.

Stay tuned

Everyone in the industry is watching to see how the House Of Cards gamble pays off for Netflix. If you consume and pay for any video content, you might want to buckle up, grab a bowl of popcorn, and tune in to the results yourself.

Disclosure: I own stock in Time Warner.

2013 Is Not The Year Of The Paywall

theballfiles — Sun, 13 Jan 2013 09:29:00 -0500

Over the past six weeks, paywalls have become an especially hot topic of conversation in the media world. In December alone, T he Washington Post, The Daily Beast/Newsweek, and The Atlantic all announced that they will likely experiment with some form of one in 2013.

It’s probably no coincidence that these announcements all came in the last month of last year. The continual decline of print advertising revenue and circulation has resulted in a decease in profitability across the industry. Publishers, determined to reverse this trend, are looking for new revenue streams. Q4 is the usual home of the annual budget meeting where publishers actually go about demanding them.

And, just like that, 2013 has already become “The Year of the Paywall.” Over the course of the next 12 months, we can expect a constant stream of selectively released paywall data flowing through the columns of media reporters. Interest will be intense. Winners and losers are ready to be crowned.

But, there’s a problem.

Major media brands just showing up to the paywall party are late. Entrance now simply reflects a long overdue recognition of something that many analysts have already understood for years: that, in our increasingly digital world, traditional media companies will have to charge for access to some form of digital content. Many publishers had been hesitant to fully internalize this need. They waited for industry leaders, such as The New York Times and Gannett, to provide some leadership before dipping their toes into the water. Now, they seem to be coming on board in a wave.

But, 2013 has moved beyond the paywall conversation. 2013 demands something different, more radical, and a bit scarier, from traditional media companies. It demands true product innovation.

Why don’t paywalls qualify as true product innovation?

They are not an innovative concept; they have been around for a while
They are an obvious attempt to solve publishers’ problems - dwindling revenue and profitability. True innovation requires solving a problem for your consumers, or audience. An abundance of free quality digital content is not something many people are complaining about
Alone, they won’t cure the disease for major media publications (see graph below). There are many reasons for this, and they are all well documented. New entrants will realize “digital dimes” isn’t just a catch phrase. It’s a reality, it includes paywall revenue, and it’s been the reality for quite some time

In 2013, it’s fine to begin there. Media companies need to know “how much can we make from selling the product we already produce to the audience we already have?” They also need to do whatever they can to protect legacy revenue streams (not keeping their digital content free helps them to do that). Most of these companies will find a subset of their audience willing to pay something for continued digital access to their existing products, like The New York Times has. They will also learn an incredible amount about digital consumption and monetization behavior in the process.

But, in 2013, that can’t be the only question traditional media companies ask.

They should also be asking themselves the following:

Who is our audience? Publications should understand as much about their audience as they can -where they live, where they work, what they do, what they consume. The more they know about them, the more they can understand…
What does our audience need? Not just want, but need. They will be more likely to pay for something that they deem necessary. The more they need something, the more they will pay for it. The key is…
What can be produced that will be unique and indispensable to them? There should not be any other product quite like any subscription product a publication produces. If there is, and it’s out there for free, you won’t find many people who will pay for it. A publication will better be able to deliver on such a proposition the more they figure out…
Can we target? The more carefully a publication targets a sliver of their audience, the easier it is for them to deliver on a unique value proposition of some kind. The new digital media entrants that are disrupting/stealing traffic from the major legacy brands have succeeded by targeting a specific subset of an audience by focusing exclusively on a specific vertical (i.e. just business, just politics, or just technology)

So, what should 2013 be the year of?

True editorial innovation. Instead of charging more for a product while slashing the budget used to produce it, traditional media companies should be thinking of what new editorial products they could be investing in.

The most venerable media brands typically have one thing in common: a sizable professional audience with desirable demographics. The value of such an audience in a digital world is increasingly not in only selling the space alongside the stuff they read.

The future, instead, could be in also selling actual stuff to them.

Back to Washington

Let’s look to our nation’s capital. The New York Times, The Washington Post, and The Wall Street Journal are the most widely-read publications in Washington, D.C. Yet, it is Politico that has been most innovative when it comes to bringing new products to market over the past few years. The price for any one vertical of their subscription product, PoliticoPro, sells for multiple times the price of those larger publications, covers only a narrow subset of what those publications do, and is produced for a fraction of the cost.

Without a massive legacy revenue stream, Politico must necessarily identify and create new ones. They are forced to start by asking themselves the basic questions: who is our audience, and what do they need. The result? The Washington Post is asking employees to accept buyouts and introducing a paywall for their existing content; Politico is launching new Pro verticals and now has sizable licensing agreements with over 1,000 different organizations.

More importantly, Politico is a developing a deep understanding of what products the D.C. professional market can use and support, and experimenting with creation of editorial products that represent significant new growth opportunities. This process, as it repeats itself, should pay dividends for Politico well into the future. For traditional media companies to compete in the long-term, they will need to do the same.

2013: The Year of Innovation?

Professionals have incredible buying power. Like general consumers, they may be willing to pay a bit for information they want. But unlike general consumers, they will pay a lot for information they deem necessary to perform their jobs better. The opportunity to introduce new, higher-end subscription products to them that challenge the traditional definition of “circulation” revenue is therefore a compelling one. Highly targeted vertical reporting, competitively priced research services, and access to data, are just a few services major publications could think about providing to them.

However, subscription product innovation could include various different types of products and doesn’t need to be focused exclusively on professionals.

No one has all the answers. But for major publications, 2013 can’t simply be about increasing prices for existing products, selling traditional ads, and cutting more newsroom budgets.

The conversation needs to be extended further, to how traditional media companies can become market leaders in media product innovation. A commitment to the process of true innovation could lead to some interesting, and unexpected, results in the year to come.

Disclosure: The author previously worked for Allbritton Communications, the parent company of Politico