Notes on cable – Part 2 – The future

I think that it’s likely the following trends will play out in the future:

  • On-demand television will become widespread because it is the most compelling delivery mechanism.
  • Technologies incapable of on-demand viewing (terrestrial broadcasting, satellite) will become less profitable.
  • High-speed Internet providers (cable and telcos) will be able to exercise increasing pricing power over their customers.

On-demand video

From the consumer’s perspective, on-demand video is the most compelling form of video delivery.

  • It is more convenient than programming a PVR (or if there isn’t a PVR, waiting until a specific time for a show to air).
  • It provides access to a vast universe of content.  It’s like having thousands of channels.
  • Eventually, video quality may be higher than traditional cable and terrestrial broadcasting.  4K on demand is rapidly becoming viable as TVs are becoming more affordable.

From a technical perspective, video quality is rapidly improving.  It is likely that the cost of providing high-quality video will continue to exponentially decline in the future.  The economics of the technology that delivers on-demand television will rapidly improve.  Netflix is demonstrating the economic viability of on-demand 4K television delivered over high-speed Internet.

Terrestrial broadcasting

The business of broadcasting video over airwaves will become a declining business.  It’s hard to say how shareholders will be affected.  The decline may be very slow.  Perhaps broadcasters may be able to sell their spectrum to other users for substantial amounts of money.  However, it is unlikely that terrestrial broadcasting will be a growth industry.

Some terrestrial broadcasters own content distribution platforms in the form of broadcast networks (e.g. Fox, CBS, NBC, ABC).  In the past, the scale of these networks gave them wonderful economics.  Eventually, these networks may (or may not) be able to adapt their business models to an on-demand Internet-based delivery world.

The content and distribution businesses

Content creators make content.  Distributors try to monetize that content as effectively as possible.

In the traditional television business, viewing habits and branding play an important role in increasing viewership.  Because of the huge number of channels available, most viewers will focus on a handful of channels.  Cable channels tend to be more successful if they focus on a niche and adhere to a “less is more” strategy.  In traditional television, programming plays a huge role in increasing viewership.  Broadcast networks tend to be able to get away with a more eclectic programming strategy.

A second important facet of cable television is that the bundling of content creates a lot of value.  Cable companies will bundle cable channels together into packages to reduce the costs of billing and the associated customer service for billing inquiries.

Lastly, cable channels and broadcast networks are incredibly difficult to displace.  Once a channel achieves dominance in its niche (or as a mainstream network), it is hard for newcomers to compete.  Newcomers have to acquire quality content to compete.  However, without high viewership, the newcomer will have to finance huge operating losses in the beginning to acquire quality content and to learn how to put together a compelling bundle of content that viewers want.

In the traditional television world, established players have moats because it is incredibly difficult to compete with them.  They have wonderful economics due to high margins and fixed-cost leverage (similar to the economics of a software company).  Competition cannot erode their high returns on capital due to their moats.

Disruptions caused by the Internet

With on-demand viewing over the Internet, some of the dynamics are different.  There are some very narrow niches that are too small for digital cable.  The Internet gives these content creators a means of distribution previously unavailable.  The Internet allows niche content creators to reach a long tail of audiences that aren’t being served by the hundreds of channels available over broadcast, analog cable, or digital cable.  Content creators who can charge a high price for their product can go directly to their customers without having to cede profits to a cable channel or content bundlers.  For example, people who are really into the sport of ju-jitsu (a very narrow niche) can pay $30 for a stream of Metamoris.

The content bundlers will lose leverage over niche high-value content creators because they can distribute content themselves.  Sports teams and sports leagues will gain increasing leverage over broadcast networks and cable channels as over-the-top Internet distribution becomes increasingly viable.

Advertising will become less important as a business model

For some background, see my previous post on the future of advertising.

In the online world, content creators have figured out that display advertising is the least effective form of monetization.  Ideally, the way to make money from content is to charge consumers for it.  This is more effective than trying to drive sales of others’ products and services because display advertising generally isn’t that effective.

I suspect that advertisers generally overpay for traditional advertising because it is very difficult for them to track their results (unless it is direct response).  While this is helpful for traditional monetization models, eventually the world may change and the inflated CPM rates for television advertising may disappear.


Netflix demonstrates the viability of selling a content bundle online online.  However, I think that content bundlers will not be able to extract as much money from content creators as before since content creators can try to distribute content on their own.  Where online content bundlers can create value is by generating savings on the costs of billing customers and providing customer service.  By charging a single subscription fee rather than a multitude of micro-transactions, there are some efficiencies that can be generated.  Consumers seem to prefer the subscription model over paying a la carte prices for video content (e.g. iTunes).

Other areas where content distribution/monetization companies can create value is by merchandising, licensing, and by localizing content for other countries.  Disney for example sells themed merchandise and offers themed rides in amusement parks.  Discovery Communications can take most of its content globally by translating the content and by substituting in local hosts.  These are things that many content creators would find difficult to do if they were to distribute their own content even in an online video world.

Change may take a long time

Viewing habits may be difficult to change.  A lot of older consumers don’t like using computers (or don’t know how to use a computer).  Some consumers may prefer watching material on a TV and may not know how to hook their computer up to their TV.  Not all consumers have high-speed Internet.  Many people in rural areas do not have access to high-speed Internet.

Currently, many industry players have experimented with an over-the-top platform with little success or mixed results.  The old ways of making money are still superior in most cases.  Over time however, the competitive advantages of entrenched distribution platforms will erode.  Some content distribution companies will not be able to extract as much profits from content creators.

Emerging markets growth

Some content platform companies will see a long runway of growth ahead of them as emerging markets increase cable penetration rates and pay for more television (e.g. Discovery).

Television infrastructure

Going forward, the trend towards on-demand video like Netflix will favour cable and telephone companies.  Cable companies have a technological advantage over telcos as it is cheaper to deliver high-speed Internet over co-axial cables than phone lines.  Cable will see higher returns on capex.

The value proposition of high-speed Internet will get better over time as various content creators make more compelling content.  The pricing power of cable and telephone companies should grow, allowing them to raise prices significantly over time.  While cable will likely lose some market share in the future (currently cable providers are losing video subscribers and gaining high-speed Internet subscribers), cable may offset their subscriber losses with much higher prices.

Television broadcasting will likely remain highly profitable but will become less so.  I don’t think that owning television stations will be the best place for shareholders to be.

Satellite broadcasting will continue to be the only viable option for many rural residents.  It will retain some market share despite cable and telcos pulling ahead on technology.

Net neutrality

There is an excellent white paper by Alfred D. Little on “The Future of the Internet”.  The first half of the white paper is definitely worth reading as it explains the economics of Internet infrastructure.

Consumers who use a video service such as Netflix can naturally run into congestion problems if there is too much traffic.  To solve this, Netflix can put servers deep within an internet service provider’s network.  In the future, more and more Internet service providers will charge Netflix fees for doing so.

ISPs may try to discriminate against Netflix since Netflix competes with a cable/telephone company’s video, over-the-top and video-on-demand services.  If consumers experience slow Netflix, they may either stop paying for Netflix.  Or, they may choose a different ISP (to the detriment of the ISP).  It should not be difficult for ISPs to collude in extracting fees from Netflix and other similar services.  In most areas, there are only one or two choices for high-speed Internet so consumer choice is limited.  The net effect will be that some profits will be shifted from Netflix to the ISPs.

Politicians may try to curb such practices with regulations on net neutrality.  They may respond to consumer requests that ISPs treat all traffic “fairly” and to prevent ISPs from discriminating against certain types of traffic.  In the past, many ISPs would intentionally “throttle” BitTorrent traffic because such traffic is almost always used to illegally download movies, software, and other intellectual property.  This debate could also spread to ISPs charging fees (to companies like Netflix) for faster connectivity.

Getting into distribution

Content distribution platforms are all about scale.  In cable’s early days, the cable operators would form partnerships and joint ventures with upstart cable channels to help them reach a critical mass.  Nurturing better content made cable a better value proposition and allowed cable operators to charge higher rates.  Cable operators also made a lot of money on their equity stakes in new cable channels.

John Malone wants the cable industry to once again collaborate on joint ventures.  He wants cable operators to collaborate on over-the-top services similar to Netflix.  Together, the cable companies can use their subscriber bases to help new distribution platforms reach a critical mass.  However, there are some obstacles in getting other cable companies to sign on:

  1. Establishing a new distribution platform will likely lead to heavy losses in the beginning.  Publicly-traded cable companies that pay a dividend and report earnings per share may have difficulty with this due to their shareholder base.  Shareholders may not want to own a stock that involves taking a EPS hit in the short term for future profits.
  2. Comcast owns content distribution platforms.  This can create potential conflicts of interest in joint ventures if the joint venture purchases content from those platforms.


Malone: Why Can’t We All Get Along?

5 thoughts on “Notes on cable – Part 2 – The future

  1. Hi Glenn,

    This is one of your best posts, I think.
    This area is clearly within your circle of competence.

    Your point about sports value is on the money —
    that`s why Malone is trying to get Formula One rights.

    Impressed that you know Metamoris. This is submission wrestling,
    not just jiu-jitsu. I do it; my circle of competence!

  2. Glenn,

    I enjoyed this piece quite a bit. Help me understand, though, when you said:
    “Technologies incapable of on-demand viewing (terrestrial broadcasting, satellite) will become less profitable… High-speed Internet providers (cable and telcos) will be able to exercise increasing pricing power over their customers.”

    I understand your comment about terrestrial broadcasting, but strictly speaking, I don’t understand it with regard to satellite vs cable and telcos. My understanding of satellite is that it is not a great medium for data uploading, but it does a good job for data downloading, allowing people to watch Netflix, Hulu, etc. via internet connections, typically if they are in areas without cable or fiber.

    Much in the way newspapers historically have had a near monopoly on the towns they were based in, cable / fiber has had near monopoly or duopoly status in most cities in the US. Once those local economies of scale were shredded via the rise of the internet, those local papers ran into a lot of trouble. Are you at all concerned about some similar event happening, with respect to the local economics of data transmission (i.e cable / telcos)? Off the top of my head, I am thinking that innovation in satellite size, data transmission, launch costs, etc. is one way in which satelites could become very problematic for cable and fiber in the US. Naturally, there are other technologies that I am not thinking of. But, should we be worried about technological disruption with respect to data transmission?

    This article, from a few months ago, on nanosats got me thinking….

    I also seem to recall reading something interesting about pseudo-satelites, which were more akin to drones that could transmit data but I don’t have that link handy.

    • There are companies right now that offer satellite Internet. Currently it’s really expensive and apparently it cuts out during heavy rain or snow. I think the latter aspect will limit its viability.

      As far as transmitting data over airwaves go, you have Wifi, Satellite, and various cell technologies. In urban areas, I suspect that there will be a shortage of spectrum that will limit how much bandwidth is available for consumption. There are some phsyical limits as to how much data can be transmitted wirelessly. (Though I’m definitely not sure about this.) The spectrum is more valuable for smartphone use than people watching video in their homes.

      In rural areas, we could hit a point where 3G/4G wireless Internet becomes economically viable. AFAIK, all forms of wireless aren’t that reliable due to interference.

  3. Pingback: Notes on cable – Part 1 – The past – Glenn Chan's Random Notes on Investing

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