What's Going to Kill the TV Business?

The Atlantic By Derek Thompson Nov 8 2012, 12:23 PM ET15 Two things: The rising cost of making television and enough cord-cutters abandoning the cable bundle to blow up the business model. The first trend is happening. The second one isn't. The first thing to ask when somebody predicts The End of Television as We Know It is: Which television are we talking about? There are three things we talk about when we talk about TV. First, there is the box with a screen, which we call "The TV." Second, there are the stories we watch on the box, which we simply call "TV." Third, there is the company we pay to transport those stories to the box, which we can call "Pay TV." Those distinctions sound simple enough, but they're often confused. A familiar argument about TV is that remotes are confusing and guides aren't intuitive, so obviously the television industry is backwards and ready to get disrupted. Partially true! Remotes are confusing and guides aren't intuitive, and it would be better for the cable companies if they weren't. But this isn't a fundamental problem with the business model between media companies, cable/satellite providers, and consumers. It's really a hardware design challenge. If Time Warner Cable comes out tomorrow with the perfect remote and an awesome guide interface, consumers will rejoice and TWC will grow its market share, and The TV will be more fun to use ... but the fundamentals of Pay TV won't change at all. Here are those fundamentals, as I explained in a column for the magazine. A small clutch of media companies owns 95% of the channels you watch. This oligopoly has the power to dictate terms to the cable/satellite companies that you pay each month. These cable/satellite providers are legally obligated to offer less popular channels alongside must-have networks like TBS and ESPN. That bundle costs the average household about $80, with roughly half going back to the media companies in "affiliate fees" and roughly half staying with the cable companies in infrastructure costs and profit. Cable companies didn't invent the bundle. They're prisoners of the bundle, just like you and I are. This model isn't written into stone, and my column doesn't claim that the cable business is invincible. It explains why cable has been resilient. There are lots of reasons why TV hasn't gone the way of music and newspapers in the Age of Internet. First, HD video is much harder and more expensive to transport than a music file or article page. Second, networks have learned from the music industry's collapse to cling furiously to their rights. But the most important reason why cable TV hasn't changed is also the simplest to understand. It simply hasn't had to. It's making too much money. What's going to kill the TV business, or at least challenge it, isn't Apple designing the perfect remote or Microsoft designing a superior guide. It's two things. First is the rising cost of entertainment, which is happening right now. The sitcoms and great dramas you love cost more to produce every year because they're labor intensive. Sports rights are seeing even worse inflation. ESPN recently signed a deal with the NFL to pay 73% more each year for Monday Night Football. So Comcast and its ilk are stuck between rising programming costs and flat-lining middle class wages. That's a problem, and eventually something has to give. But in the short term, providers can merge and channels can be cut and costs can be saved. Expensive shows and sports rights shouldn't destroy the TV business on their own. Combined with a second trend -- the accelerating exodus of attention away from television -- the TV business might really be in trouble. But this second trend is still more of a projection than a reality. One hundred million households still pay for a bundle of networks. That number isn't really going down. With the pace of household formation tripling in the last year, it could even go up. The number of cord-cutters -- households that have replaced the bundle with over-the-Internet video like Netflix -- is in the low single-digit millions. TV-providers have even found a hedge against cord cutting. They've become Internet-providers and expanded overseas to make up the revenue they're not making here. Cord-cutting is a marginal trend that could sneakily turn mainstream, creating an innovator's dilemma for TV and cable. But not yet. If you're interested in the future of TV, don't pay too much attention to the remotes and the guides. Just follow the eyeballs. They're still tuned in.