Notes on cable – Part 3 – Monetizing content

This post will look at how the content of a show, its monetization strategy, and avenues of distribution all interact with each other.  In the end, I think that the most important factor in monetizing content is scale.  Being able to monetize a piece of content repeatedly creates incredible value.

Advertising

This monetization strategy changes the way content is produced.  Some countries such as Canada have restrictions on the amount of television advertising.  However, Canadian television producers want to sell their show internationally where more advertising is allowed.  So, the television show may be produced with filler content (e.g. bumpers) to fill time that would otherwise go to advertisements in other markets.

On a deeper level, the prevalence of advertising-supported channels is somewhat self-reinforcing.  Every television producer wants to sell his/her show into other markets.  This is easier if the show’s running time allows for commercial breaks.  So, many shows are produced with commercial breaks in mind.  The end result is that very few cable channels offer programming without commercial breaks.  In an Internet-based delivery world, this may change because on-demand online viewing doesn’t have the restrictions of programming for linear television.  We may see more content produced without commercial breaks and with flexible running times.  This reduces the amount of time spent on padding out a show to fill airtime.

Cliffhangers

Some broadcasters will pressure the production side into adding cliffhangers before every commercial break so that viewers will come back after the break.  This is very evident if you compare the American and UK versions of Kitchen Nightmares.  Personally, I hate the (fake) cliffhangers and strongly prefer the UK version of Kitchen Nightmares.  I suspect that the cliffhangers do not create value but I could be wrong.

Technology and ad skipping

In the long run, advertising-supported business models face headwinds from:

  • The increasing use of PVRs that allow users to skip ads.
  • Paid over-the-top services that offer ad-free content.
  • Ad blocking software that works on advertising-supported online services.
  • Illegal downloading, streaming, etc.

I believe that legal ad-free services (e.g. Netflix) will compete effectively with illegal downloading because it’s more convenient and because many people don’t like stealing content.  If video services include ads, it will become more difficult for those services to compete with downloading.

However, live programming such as sports and news will likely remain an area where advertising stays a viable business model.

Trying to please everybody

Because many channels and broadcast networks are supported by advertising, there are incentives to:

  1. Gain as many eyeballs as possible.
  2. Stay focused on core demographics.
  3. Avoid disparaging current and potential advertisers.
  4. Avoid taking viewpoints that advertisers do not want to be associated with.

In aiming for broad appeal, some broadcast networks try to avoid offending people.  Subscription-based services do not have the same restrictions.  Because of their business model, they have to care about whether or not their viewers like their shows enough to pay a subscription fee.  They care a little bit more about having viewers love them rather than focusing on having less people hate them.  As well, it makes sense for subscription services to go after niches that broadcast networks won’t touch.  A company like Netflix can do things in its original programming such as:

  • Kill a dog (potentially offending animal lovers).
  • Show lots of nudity.
  • Lesbian relationships.
  • Show a Christian character in an unflattering light, potentially offending Christians.

Subscription services have a little more leeway in producing edgier, ballsy television.

Product placements

In my opinion, there are good product placements and bad product placements.

A good product placement is one where the content highlights that particular product.  For example, Conan O’Brien’s production company presumably receives payments from video game companies to make video segments featuring their games (e.g. Conan’s segment on Grand Theft Auto is available on Youtube).  Conan is clearly not a gamer and doesn’t seem to enjoy many of the video games that he plays.  However, he finds ways to make his videos funny and to avoid saying bad things about the featured product.  His rating system for games clearly avoids having to say what he really thinks about a game.  It’s a win for the video game company because their product is featured in a non-negative light.  It’s a win for the viewer because these videos are funny.  And it’s a win for Conan because he gets to make money.

In my opinion, a bad product placement is one where the product is in the background.  Sony movies tend to have a lot of these.  For example, Spiderman switches from Microsoft Bing to Google in The Amazing Spider-Man 2.  The problem with these product placements is that they don’t convey a selling proposition.  They do not explain the value of a product to the consumer or why they should use one product/service over another.  On top of that, the results are extremely difficult to track.  I don’t see the value proposition in this type of product placement.  Nonetheless, there is money to be made from selling this type of hocus pocus advertising.

Sponsorships

Sponsorships are another form of advertising.  While branding as a form of advertising can work (e.g. Red Bull), I’m not sure if it’s particularly effective for advertisers.

Sponsorships can be used to get around advertising restrictions.  PBS for example claims to have no advertising.  However, it will happily supplement its shows with “sponsorships”.

Advertising your own products and services

A toy company like Hasbro might produce television shows to help drive sales of toys from that TV show.  They can dictate the content to help future toy sales.  Because toy ponies would likely sell well, it would make sense to do a TV series featuring toy ponies.  Such a TV series would be a giant advertisement for the toys.  In practice however, Hasbro hasn’t reached the full potential of vertical integration.  Its My Little Pony toys do not look like the characters from the TV show. In the picture below, the hat is clearly the wrong colour and the horse is a slightly different color than the one on the packaging.  It seems to me that Hasbro could have changed the show so that the colors would match up with toys that they can produce.

applejack-toy

There are some ardent adult fans of the TV show who will buy higher-quality My Little Pony merchandise from very small vendors who do not pay royalties to Hasbro.  In my opinion, Hasbro has missed some opportunities.  Nonetheless, the underlying business model of making TV shows to sell toys is a sound one.

Another model is to release some content for free and to charge consumers for paid content.  UFC pays for the production of The Ultimate Fighter to help drive sales of its pay-per-views.  From what I understand, the UFC does not receive broadcast license fees for the show.  It has to fund the production costs out of pocket and from sponsorships.  The TV network (SpikeTV) smartly figured out that it could receive free programming.

Going forward, the Internet will make these business models even stronger.  It allows for the potential of free (advertising-supported) content reaching a much wider global audience.  Perhaps we will see kids’ shows being released for free via Internet-based services with the goal of driving merchandising sales.  Children’s programming might increasingly target secondary adult audiences because it turns out that there are a lot of adults that enjoy kids’ cartoons.  As well, adults have more money than kids to spend on merchandising.  In the traditional model, kids broadcasters may insist on exclusivity.  Because the cartoons end up on channels that target kids (and co-viewing moms), the content may not have much reach among adult fans of cartoons.  In the future, there may be less exclusivity and it may become easier for adult fans to access content legally.  While I’m personally not a fan of My Little Pony, the show has a cult adult following (both male and female) that cares about the quality of the toys.

Theme parks, soundtracks, other merchandising, retail stores, etc.

Disney is an example of a company that has been very successful in taking a movie and extending that movie experience into other products, services, and experiences.  Its Disney World theme parks offer rides that are themed around a particular movie.  The theme parks feature live performances from Star Wars characters.  Disney owns retail stores that sells various types of branded merchandise.

Conflicting interests, needs, and points of view

Ideally, content producers want their content to be sold into as many markets as possible.  In the television world, this gets complicated when multiple broadcasters are involved.

Cultural differences

Cultural differences may mean that certain elements of a show may not translate well in other countries.  One type of humour that works in one country may not work in another country.  Here are some examples from the show Pokemon that won’t work with North American audiences.

Some Japanese humour does not translate well to North America.  In one episode, a male character named James cross-dresses and enters a beauty pageant.  It is supposed to be funny because James (clearly a man in every other episode) goes to great lengths to win the beauty pageant.  He makes fun of Misty (the crying girl) for being too young to develop full-sized breasts.

Pokémon_episode_Beauty_and_the_Beach_-_screen_capture_

Pointing guns at children and guns being fired at children can be an issue in North America:

pokemon-gun-pointed-at-children

Characters that resemble blackface are racially offensive to some.  The solution is to change the colours of the character:

jynx-blackface

Points of view

Different broadcasters may have different points of view as to what is desirable in content.  The US version of Kitchen Nightmares had cliffhangers while the UK version did not.  In the case of reality television, this is not a huge problem because the material can be re-edited for different markets.  For other types of shows, making different versions is much more difficult and could impose significant production costs.

For a show that is currently in production, broadcasters can get into endless battles with each other over the content of a show.  They can also get into battles over little things that do not matter.  For a show that is being pitched, somewhat similar conflicts can occur.  Different broadcasters will have different views on what will be successful.  This makes it very difficult for television producers to sell licenses to the show that they are trying to create.  Broadcasters would generally prefer a big-budget show over a low-budget show.  However, a big-budget show can only be financed if enough broadcasters get on board.  Achieving scale can be difficult if broadcasters have conflicting needs, points of view, etc.

Linear programming

How a cable channel is programmed plays a big role in whether or not a show will succeed.  A show can draw dramatically higher or lower ratings depending on what channel it appears on, what time it appears, and the shows the precede or follow it.  Family Guy (Wikipedia) is an example of a show that was hurt by bad programming.

Because of the ways consumers view television, it makes sense for cable channels to stick to well-defined niches and to a particular brand.  This can make it difficult for television producers to sell their content internationally if potential buyers of a show feel that the show does not fit their brand (or programming schedule).

Producer abuse

In some markets, the power dynamic is heavily in favour of the broadcaster.  This is true in Canada where the broadcasters only purchase Canadian programming because they are forced to and may try to have the producer take lower producer’s fees.  In some cases, the broadcaster may try to abuse their powers to the detriment of their business partner.  Broadcasters may try to get things such as:

  • Money.
  • Financing / interest-free loans.  The contracts for a show dictate when the broadcaster is obligated to pay the producer.  An evil broadcaster may look for technicalities in the contract to avoid paying the producer on time.  This can be expensive for the producer as they might have to quickly find and pay for last-minute financing.  I believe this rarely happens but it has happened in the past.
  • Content to put on the broadcaster’s website.
  • Restrictions on the content being offered on the Internet (or home video or other mediums) within the broadcaster’s territory.
  • Eating the cost of endless changes.

The conflicts of interest between the television producer and broadcasters (and between broadcasters) can hurt the economics of a show.  Some broadcasters may not want the producer to sell product placements if the broadcaster does not get a piece of the pie (especially if the broadcaster sells advertising to products that compete with the product placement).

Paying for content

Getting consumers to pay for content is a fairly straightforward business model.

  • Subscription-based premium cable channels.
  • Subscription-based over-the-top (e.g. Netflix, HBOGo).
  • A la carte purchases (e.g. iTunes, video on demand).
  • Home video (VHS, DVD, Blu-Ray).
  • Movie tickets.

Price tiering

One way to monetize content more effectively is to charge more money to particular market segments that are willing to bear the additional cost.

Quality: Distributors charge significantly more for a Blu-Ray than a DVD.  Streaming 4K video will cost the consumer more than streaming lower quality video.

Time/windowing: Those getting content first pay a higher price.  A movie is first released in theatres.  Then it will come out on home video and/or video-on-demand.  Eventually it will make its way onto premium cable channels.  Later on, the content will reach mainstream channels.

Because of illegal downloading, price tiering based on time may work less effectively in the future.  When content is first released in movie theatres, illegal “cams” (camera recordings) will be available for downloading.  The quality of cams is getting better (thanks to better consumer camera technology) though many people do not like watching cams.  Once video is available outside movie theatres, the quality from illegal downloads will be practically the same as legal versions of the content.  The availability of high-quality illegal downloads may be compelling to the consumer if they have to wait years (or even months) before they can buy the content legitimately.

Income discrimination: Some countries have higher median incomes than others.  Some companies will try to charge higher prices in richer countries.  The DVD format had region locking as a way of enabling income discrimination.  If viewing shifts to mainly streaming video, these artificial technological limitations may not work effectively.  Technology may allow users to circumvent some of these tactics, e.g. users can use VPNs to circumvent country/region restrictions.

Overall, I think that companies will still find ways to engage in price tiering.  Some of the old ways will be replaced with new methods.

Opportunities for value creation

If real estate is about location location location, monetizing video is all about scale scale scale.  Because video programming costs almost nothing to reproduce, economies of scale are a driving force in the industry.  My post on the Canadian media landscape talks about why Canadian film/TV production is rather uncompetitive despite many shows having two thirds of the production budget subsidized by various levels of Canadian government.  The advantages of scale outweigh the advantages of massive subsidies.

Global distribution already exists.  A show that appears on a major American broadcast network will be available practically everywhere else in the world.  Hollywood movies are distributed globally.  Some cable channels have an incredibly large global footprint.  Discovery is in more than 220 countries and territories (even more than Netflix).  Going forward, it is likely that over-the-top services will expand their global footprints.  Technically, over-the-top services already have a global footprint because VPN services allow users to circumvent country/region restrictions.  The next evolution is for over-the-top services to obtain global rights and to offer more localized content in local languages.  Thanks to the Internet, it is becoming increasingly easy to distribute digital content on a global scale.  The challenge is in monetizing these new over-the-top services.  These services will need to invest in content so that they can attract enough paying customers to reach the critical mass needed to be profitable.

Simultaneous global releases may reduce the amount of piracy that consumers engage in.  If users have to wait months before they can watch content legitimately, they may resort to downloading to get what they want.

Minor efficiencies

Global distribution makes it easier for producers to sell their shows.  Having to sell a show to multiple broadcasters takes more time and effort.  If the production of the show is contingent on securing licenses from multiple broadcasters, not attracting enough broadcasters can stop shows from being financed and produced.  Having to pander to the needs of multiple broadcasters (who may fight each other over the content of the show) also imposes some minor production costs.

Vertical integration

Some media companies like Disney heavily pursue vertical integration while other companies like Time Warner and Cablevision sometimes shun it (e.g. via their spinoffs).  There are some synergies that can be generated with vertical integration.

With cable companies and cable channels, the main synergy is in driving scale.  Cable companies can achieve scale either through consolidation or through joint ventures (like the early TCI days).  Their scale allows upstart cable channels to achieve the critical mass needed for them to be successful.  Going forward, John Malone foresees a future where cable companies can band together to establish over-the-top services.

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