The last time I wrote about the traditional cable bundle – which has been so lucrative to networks like CBS and HBO – I warned that change comes very slowly, but then happens all at once.
This is the all-at-once part. Last week was pretty big for television, one in which not just a cable channel, but a broadcast one as well, jumped onto the streaming bandwagon with both feet. We all knew it was coming, but not this fast. The future, as it always does, sets its own schedule.
And Netflix is the necessary figure in what will come to be seen as the year that television staged a jailbreak. Yes, Netflix, which was supposed to lay waste to traditional media companies, may have saved them instead.
True, Netflix’s earnings took a beating last week, partly because it missed estimates and partly because, well, it now has company. But its bet on streaming has never looked smarter.
Netflix pointed a way forward by not only establishing that programming could be reliably delivered over the Web, but showing that consumers were more than ready to make the leap. The reaction of the incumbents has been fascinating to behold.
As a reporter, I watched as newspapers, books and music all got hammered after refusing to acknowledge new competition and new consumption habits. They fortified their defenses, doubled down on legacy approaches and covered their eyes, hoping the barbarians would recede. That didn’t end up being a good idea.
Television, partly because its files are so much larger and tougher to download, was insulated for a time, and had the benefit of having seen what happens when you sit still – you get run over.
Instead, traditional television is morphing in nontraditional ways. Last week, Richard Plepler of HBO and Leslie Moonves of CBS both announced streaming services that would bypass established distribution systems. Suddenly, two fairly traditional media executives, sitting on top of lucrative companies, were adopting the tools of the insurgency and augmenting their current business models with ones that leave the bundle behind.
For any legacy business under threat of disruption, the challenge is to get from one room – the one with the tried and true profitable approach – to another, where consumers are headed and innovators are setting up shop. To get there, you have to enter a long, dark hallway, a scary place.
I had always thought that HBO would hold hands in the hallway with existing cable providers and offer an over-the-Web product that they would jointly sell on broadband. There will be some of that, but HBO’s programming will also show up on Xboxes and as a part of stand-alone offerings. HBO’s move is motivated partly by global considerations. Right now, HBO has licensing deals all over the world and a complicated set of arrangements with an array of cable systems. An Internet product will be lower priced while also letting HBO develop a direct relationship with consumers. And in sidestepping cable in some instances, HBO – likewise CBS – will have its hands on precious viewer data, an asset Netflix has used to lucrative ends.
The strategy has its risks. In 2012, HBO announced that it would offer a streaming-only service in Denmark, Finland, Norway and Sweden, partly to complicate Netflix’s entry into the market. But the product was delayed, then disappointed customers when it started. And here in the United States, those of us who piled online to watch the finale of “True Detective” on HBO Go received a “fatal error” message instead.
Delivering high-definition video online is complicated – a different skill set than making must-see programming.
But those early kinks seemed to have been ironed out, and Plepler of HBO surprised many, including me, when he announced Wednesday morning during an investor meeting for its parent company, Time Warner, that sometime in 2015, the network would christen a stand-alone Internet-based service.
“It is time to remove all barriers to those who want HBO,” he said.
Just in case people didn’t get the message, he later added, “This is the most exciting inflection point in the history of HBO.”
Reed Hastings, the chief executive of Netflix, who in the past has delighted in tweaking the network, responded in unexpectedly respectful fashion, another sign that the dividing line between insurgent and incumbents is increasingly becoming meaningless.
“The competition will drive us both to be better,” he wrote in a letter to investors. “It was inevitable and sensible that they would eventually offer their service as a stand-alone application.”
Consider the advantages. In addition to meeting a cohort of young consumers in the place and manner in which they watch, programmers will gain leverage in negotiations with distributors. With more than one route to the ocean (of consumers), HBO and CBS will be less exposed should Comcast manage to consolidate much of the video ecosystem. And the next time CBS fights with a cable system, it can do more than take out full-page ads to complain – it can tell consumers to use its cheap, $6-a-month service to get its must-see shows.
If another service like Aereo comes along offering recorded broadcast programming over the Web, CBS can say, by the way, we are already in that business.
In addition to funneling cash to legacy media providers by paying close to $3 billion for their programming, Netflix has schooled them on the way forward by challenging their business model without tipping it over.
But with each passing day, it is becoming clear that content is not just a commodity – it is precious and valuable – and distribution is up for grabs.