Notes on cable – Part 5 – The future winners of Internet TV

The future winners of Internet TV will likely be the companies that can:

  1. Intelligently buy undervalued content.
  2. Achieve scale (or have scale).
  3. Create good software

Buying content

Here are some reasons why certain content rights may be undervalued.


Some content has poor viewership numbers due to limitations in how content can be distributed.  An artsy independent film doesn’t reach most consumers because it will only be released in a small number of theatres.  Somebody who does not live close to a theatre that shows independent films will be unable to watch that film when it is released.  Netflix removes those geographical limitations since more consumers have access to high-speed Internet than arthouse cinemas.

Cable channels have difficulty programming certain niches

Anime for example can be difficult to program due to cultural differences.  One major difference is that many “shonen” (young boy) anime series repeatedly contain shots of female characters in sexually suggestive poses (ecchi fanservice).  The creators of a show will go out of their way to place female characters in a shower, bath, or hot spring in some state of undress.  Or, the female characters may “accidentally” expose themselves while climbing a ladder, bending over to pick up an object, etc. etc.  Often, these additions have nothing whatsoever to do with the story.

Shonen anime is generally targeted mainly to 10-18 males in Japan (e.g. often the characters go to middle school or high school) with appeal to a large age group from about 10-42. In North America, the fanservice may be seen as sexist and a little too mature for the lower range of 10-18 males.  For branding reasons, cable channels may wish to avoid such material during the daytime.

On American cable, Cartoon Network has its “Adult Swim” brand.  From 8PM to 6AM, the channel switches over to “adult” programming and includes a small amount of shonen anime such as Gurren Lagann and Soul Eater.  Both shows features kids with average ages of roughly 15.  Both have plenty of fanservice.  These shows aired at around 1:30AM.  The late time slot implies an adult audience that is into kids’ programming.  North American teenagers will have difficulty discovering such material on cable due to the late time slot.  In practice, piracy is rampant for anime material (almost all of it is available with fan-made subtitles).  Before DVD sets of TV series were available, piracy was the only way that anime fans could enjoy it.

Opportunity exists because there is a huge volume of high-quality shows being produced by Japan with very limited legal distribution outside Japan.  The huge supply of anime versus limited demand from non-Japanese broadcasters favours content buyers.

Netflix’s long-term view from April 2013 mentions some niches:

  • Korean soaps
  • Anime
  • Sci-fi
  • Sundance films
  • Zombie shows


Netflix does not use pilots while Amazon’s over-the-top service does.  The advantage of a pilot is that they can give indications about whether or not a show will be successful.  Network broadcasters use pilots because their primetime slots are extremely valuable and should not be wasted on shows with low viewership.

There are some advantages to avoiding pilots.  Netflix’s original programming is shot all at once.  (This is nothing new.  For example, The Lord of the Rings trilogy was produced by shooting all three movies at once.)  This can lower production costs because less time is spent shooting at the same locations.  Every time the production returns to a location to shoot another scene, the production has to spend time traveling to that location and time setting up lights for each repeated camera angle.  By only having to go to a location once and doing fewer setups, a production can gain some minor efficiencies.

Another potential benefit of not doing pilots is that the cost of talent can be lower.  If a pilot is successful, the actors will ask for more money because their value has been proven by the pilot.  This is the same idea as actors’ rates going up when a popular show is renewed for another season.

Low-risk original productions

Netflix can look at the data on what its current subscribers enjoy and make projections about how original programming will fare.  There are some cases where their predictions are more likely to be accurate.  Arrested Development is a continuation of a popular existing series that lacked enough viewership to be renewed on traditional cable.

Creative freedom

The nature of subscription-based over-the-top television allows for certain creative freedoms:

  • Less time wasted on recaps and exposition.
  • Content creators can explore more intricate storylines because they can safely assume that viewers have watched every previous episode.  With linear television, some viewers may miss a few episodes and not understand the context for the current episode that they are watching.  Recaps in each episode reduce this to some degree.
  • If the show will not be monetized with advertising, the show will have even more freedoms because there is less pressure to gain eyeballs and to achieve broad appeal.  The show can deal with subject matter that advertisers may not want to be associated with.
  • Not having to present cliffhangers before every commercial break.
  • A show can present nudity that may be unacceptable if the show were to be broadcast during prime time hours via free terrestrial broadcasting.
  • Flexible running times allow content creators to avoid having to make creative sacrifices so that an episode is no longer than 22/44 minutes.

Because of these creative freedoms, A-list talent may be willing to work at reduced rates.  Many of the people who entered the film/TV industry did not do so for the money.  In addition to the creative freedoms listed above, they may care about things not inherent in Internet TV:

  • The artistic merits of the content.  Because Netflix is subscription-supported, it is rewarded for making content that consumers love.  It can go after original programming with more artistic merit.  A-list actors and directors are sometimes willing to work on such projects at lower rates (more so if their work may win Emmy awards or Oscars).  Some creators will choose not to go ahead with a fully financed show if they do not have enough money to fully execute their creative vision.  In other words, some creators will turn down a high-paying job if it would taint their vision.
  • Not having to deal with numerous requests for revisions and changes from broadcasters.  Many TV shows from broadcast networks are in production while finished episodes are being aired.  Networks may request changes to the show based on feedback from viewers.  Netflix airs a TV series after the production of the show has been finished; they cannot aggravate showrunners with notes based on viewer feedback.

Old content

There is a large amount of old content that is very high quality.  However, such material may have limited appeal from broadcasters because there is lower viewership from past audiences that have already watched the material.  Small audiences are less of a problem for Internet TV services.  They have an easier time monetizing content that appeals to small audiences and content with niche appeal.

Going forward, increased competition from Internet TV providers will likely raise prices for rights to old content.  Netflix will have a more difficult time buying undervalued content.

Quality over quantity

As Internet TV evolves, I think that we will see a shift towards quality over quantity.  There is too much content in the world relative to what a human being can reasonably consume.  As Netflix notes in its long-term vision:

As we’ve gained experience, we’ve realized that the 20th documentary about the financial crisis will mostly just take away viewing from the other 19 such docs, and instead of trying to have everything, we should strive to have the best in each category. As such, we are actively curating our service rather than carrying as many titles as we can.

Because Netflix (at least in the US) has assembled a fairly large library of content, Netflix is shifting towards quality over quantity.  I believe that is why Netflix is moving into buying first-run rights to content and to engage in original programming.


As Internet TV evolves, there will likely be a shift towards Internet TV-friendly rights.  From the consumer’s perspective:

  • Having certain content being blocked in certain countries is confusing.  Blocking content based on country is not a great barrier because there are technological means to get around barriers (e.g. VPNs, illegal downloading).
  • Having season 2 of a series available on a streaming service without season 1 being available is confusing to consumers.  Many consumers want to start from the very beginning.  I believe this situation occurs because the content owner already negotiated away the season 1 rights in a prior deal.  Going forward, I think that content owners will try to avoid such situations.
  • Bad subtitles.  Some rights owners do not allow the distributor to change the subtitles and may insist on low-quality subtitles.  Bad subtitles is one of the criticisms of as its users find that fan-made subtitles are higher quality than the official subtitles.

The ability to negotiate more sensible content rights is a sign of good management.

Rowing in the same direction

One of the problems that some Internet TV services face is getting all of their content providers aligned in one direction.  Currently, many cable companies provide a “TV everywhere” service that allows users to watch their cable channel programming in a non-linear video-on-demand fashion.  One of the annoyances is that users can fast forward through some channels but not others, due to the rights that the cable company was able to negotiate.  It’s unintuitive to the consumer.

Unfortunately, the cable channel companies have different opinions as to what the best monetization strategy is: advertising or subscription fees.  In an over-the-top world, I think that subscription fees will be a better model due to ad-skipping technology (ad blockers, illegal downloading, etc.).  Traditional content companies may be hurt somewhat by their inability to work together and their reluctance to embrace subscription fees.  They may also be hurt by their insistence on cliffhangers to try to get consumers to stick around for commercial breaks.

Scale in an Internet TV world

In the future, I think that consumers won’t be willing to subscribe to more than several subscription services at once whether it’s Netflix, niche content like WWE Network, or some other service.  This is analogous to how most consumers do not regularly watch more than several cable channels.

I see two things happening:

  1. The distribution of viewership will become more uneven.  The top content platforms may take an even larger share of the market.
  2. The long tail will get longer.  Internet TV essentially allows for an infinite number of “channels”.  The Internet will continue to have esoteric niches such as what is doing for training videos.  There will be a proliferation of niche subscription services for professional sports, wrestling (e.g. WWE network), etc. etc.

While it’s easy to imagine #2, I am less sure about #1.  Historically, the big 3 broadcast networks (ABC, CBS, and NBC) have seen their market share shrink over time due to competing over-the-air and cable networks.

Previously, cable companies performed the service of consolidating the consumer’s billing and content.  Going forward, companies like Netflix may increasingly perform this service instead.  A Netflix-esque service might offer content that is equivalent to several or tens of cable channels.  Most consumers will only be interested in a few of those “channels”.  However, it is easier if the consumer pays for the bundle rather than buying several services/channels à la carte.  Internet TV companies may have very little difficulty in growing their bundle.  They can simply buy more content and raise their rates.

For linear TV, growing the bundle was difficult to do because it essentially required the content company to start a new channel.  It takes time for consumers to discover the new content on new channels, to understand the scheduling, and to change their viewing habits.  The programming aspect of linear TV was difficult because bad scheduling could cause a good show like Family Guy to receive low ratings depending on its time slot, how many times the show has been moved, and the shows programmed around it.  David Zaslav’s interview with the Cable Center also provides some other examples of how programming can have a dramatic effect on ratings.  Internet TV on the other hand has fewer limitations to growth.  Recommendation engines (and fan-made websites) help users easily discover new content.

Scale within niches

Within any particular niche, it is likely that the #1 company will dominate and make most of the profits.  For any particular sport, the most popular league will often enjoy a moat against the competition.  Because of scale, the sports league (and its affiliate) can afford to pay for the best talent due to their economies of scale.  Because they have the best talent, they will hold onto their dominant market share.


There are major challenges in developing the software needed to support Internet TV services.

  1. Analytics.  Netflix executives talk about how they look at what series users finish, what scenes they rewatch, what scenes cause them to stop watching, etc. etc.  This data helps drive Netflix’s content purchasing decisions.
  2. User interfaces.  Many people want to watch video content on a big-screen TV rather than a computer monitor.  This can sometimes be difficult.  There is huge variation in the hardware that makes a TV a “smart” TV whether it is a gaming console, a standalone device, a set-top box with other functions, or hardware already built into the TV.  Creating software that is compatible with all these different types of hardware is a challenge.  On top of that, the hardware remote controls for many of these devices are different (e.g. different number of buttons, different button layouts).  This requires changes to the user interface.
  3. Back-end content distribution networks to reduce the ‘distance’ between the consumer and the server that stores the desired video content.
  4. Consumers want to watch content while on public transit and in other scenarios where they may not have an Internet connection.  Going forward, perhaps companies other than iTunes will develop more software to do this legally.
  5. Recommendation engines to make content discovery easier.
  6. If the platform forces users to watch advertising, it should at least allow users to fast forward through non-advertising material (e.g. this is a problem with Comcast’s Xfinity).  On the rights side, it doesn’t make too much sense to remove the ad-skipping functionality of a PVR/set-top box.  Consumers can easily ditch a crippled set-top box for illegal downloading.

Currently, many Internet TV services have poor user interfaces.  Normally, developing software can be very difficult.  For whatever reason, some companies (especially non-software companies) tend to be really bad at developing software even if they throw a lot of money at it.  The Internet TV companies that are good at developing their own software will have a small edge over the competition.  However, I think that users will be willing to put up with bad software if the content is good.  Content and scale are related because those with scale will have the economics that allow them to buy the best content profitably.  Software will only play a minor role in the success of an over-the-top service.  However, good software will help these services compete against illegal downloading as good software offers more convenience than illegal downloading.

Horizontal and vertical synergies


Some major tech companies have a lot of data center infrastructure with excess bandwidth and storage (e.g. Google, Amazon).  They have a very minor cost advantage when it comes to delivering Internet video.  While this synergy exists, I suspect that it will not make much of a difference in the long run especially since bandwidth costs will come down.


Certain companies have achieving global scale and therefore are able to produce a lot of high-quality content.  Big American broadcast networks and movie studios are essentially able to achieve global scale.  Being able to aggregate high-quality content is extremely helpful in starting up a new over-the-top service.

The future winners and losers


Scale is a huge advantage in display advertising networks.  Youtube is already the largest free/non-subscription video service.  Youtube is the #2 driver of Internet traffic whereas Netflix is #1 (according to the white paper on The Future of the Internet).  It will likely retain this lead going forward.

If Youtube can improve its ad monetization, it will be able to pay more money for content by giving its Youtube partners more advertising revenue.  Google understands ad monetization and already develops useful tools such as Google Analytics and automatic bidding algorithms.  I think that Google will be able to improve its ad rates in the future.

Different business models may develop for Youtube:

  1. Content produced mainly for non-commercial reasons.  Many Youtubers make videos simply to communicate with other human beings.  Non-profit organizations (e.g. C-SPAN) might release content on Youtube simply to communicate with a mass audience.  Youtube will be able to make advertising dollars from such content.
  2. Content produced primarily to sell other products (e.g. branded merchandise) and services.  For example, UFC sells pay-per-views.  It releases various forms of free content on Youtube (e.g. free fights) to advertise its paid content.  Youtube will essentially collect a royalty on such free content.
  3. Content intended to be monetized mainly by advertising.  If Youtube is able to monetize better than traditional television, then Youtube can potentially be quite disruptive to broadcast networks.  This would greatly reduce the amount of money broadcast networks can make as intermediaries.

Going forward, Youtube will almost certainly see higher-quality content as its popularity attracts more content creators.  Youtube will likely take more time away from other activities.  If business models shift to big-budget productions being streamed on Youtube at very high quality (e.g. 4K, better than cable/over-the-air), the service might morph into something even more addictive.


I think that Netflix will clearly be a winner.  Management seems to be doing an excellent job of buying content, commissioning original content, and developing great user interfaces.  Its users love the service.  At the same time, the company is able to generate high margins after it is established in a country.


Hulu currently seems to be succeeding.  Its ties to broadcast networks and movie studios is a big advantage as it has a good library of content.  On the content side, it is doing some smart things such as acquiring Korean dramas (which I think are undervalued).  However, while Hulu may continue to do well in the future, it is also possible that it is replaced by another video service.

Hulu may have problems in getting its partners to co-operate and in shifting to a subscription-based model.

Google Trends suggests that Hulu is lagging behind Netflix in worldwide popularity (Hulu operates only in the US and Japan).

Netflix versus Hulu

Netflix ‘clones’

It is unlikely that content creators will allow Netflix to wield too much power.  There will definitely be a #2 player that competes head-on with Netflix.  However, I don’t know what will happen.  Technology-related companies tend to be very difficult to predict.  However, I think that there will be a lot of losers in this space.

My Prime (Liberty Global)

Their content library isn’t very good.  My Prime/Liberty Global doesn’t have much scale compared to its competitors.  Some users hate Liberty Global’s Horizon set-top box.  In the Netherlands, one Dutch review gives the My Prime service very low marks.  While I am a John Malone fan, I think My Prime will be a loser.


Amazon doesn’t inherently have scale… though they are willing to solve that problem by spraying it with the money hose.

While Amazon isn’t terrible at buying content, I think that Netflix is doing a better job.  In original programming, I’m not sure if Amazon’s strategy of paying for medium-budget original productions is the best strategy.  (Wikipedia has a list of Amazon’s original programming.)  It is likely cheaper to acquire licenses of old shows (with bigger budgets) or to acquire first-run licenses of foreign productions.  For example, Netflix acquired licenses for the old Canadian show Trailer Park Boys.  They likely got a good deal on it because that type of show is difficult to program on traditional cable as the humour in the show is very unique and attracts a niche audience.  There is also a lot of swearing so many channels cannot air it during the day or evening (depending on the channel’s branding).  Going after disadvantaged shows like Trailer Park Boys may be a better deal than doing medium-budget original programming.

Or looking at it differently, Netflix’s view is that they should pursue original programming if it is cheaper than purchasing alternative content.

Intel, Sony, and other smart TV manufacturers

They lack scale relative to Netflix, Hulu, Amazon, etc.

Manufacturing TVs is very different than making good software or buying content.  I’m not optimistic about services started by smart TV companies.

Niche bundles – Crunchyroll, Dramafever, etc.

Crunchyroll and Funimation are niche providers of anime.  Dramafever is a niche provider of Korean dramas and is branching out into other Asian programming.

I have no idea how effectively these niche bundles will compete against mainstream bundles such as Netflix/Hulu that also offer niche programming.

  • The mainstream bundles will likely sustain an advantage in software due to their scale.
  • The niche bundles have a deeper selection of content within a particular niche.
  • However, fans of a particular niche will enjoy content outside of that niche.  They will enjoy a lot of the other content in a mainstream bundle.
  • Because the niche companies will have to buy a lot of content within their niche, they will not be able to selectively go after undervalued content.

Overall, I think it will be difficult for niche bundles to compete against mainstream bundles due to their inferior economies of scale.  The value proposition of Netflix and its clones will likely always be better as they can buy content more effectively.

TV everywhere

The difficulty with TV everywhere is that it is hard to get every content provider rowing in the same direction.  From the consumer’s perspective, it’s confusing when certain shows aren’t available or that some channels do not allow ad skipping.

On the user interface side, individual cable companies do not have as much scale as a company like Netflix.  Currently, cable companies and telcos are not pooling their resources together to develop good user interfaces.

In the long term, I see TV everywhere as Internet TV with many of the limitations of traditional television.  The advertising-supported business model means that the content may have annoying cliffhangers.  The nature of linear television limits the universe of content available, e.g. less niche programming.  These services have inherent disadvantages when competing against pure Internet TV services.  The industry may shift towards live programming (e.g. news, sports) where it has strengths versus Internet TV services.  In the short term, TV everywhere may see a lot of use because a lot of the best content is on it.

 *Disclosure:  No position in AMZN, NFLX, GOOG(L), or LBTYA/B/K.  I own LBRDA.

4 thoughts on “Notes on cable – Part 5 – The future winners of Internet TV

  1. Pingback: Data centers – Part 4 – The future of infrastructure? | Glenn Chan's Random Notes on Investing

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