Gradually, Then Suddenly: The Pay TV Bundle Erodes

“How did you go bankrupt?”
Two ways. Gradually, then suddenly.”
—-Ernest Hemingway, The Sun Also Rises

The Internet does one thing very well (among others).

It destroys business models, particularly those long held by legacy media companies.

Two years I ago, I speculated that HBO had spent at least five years dreaming about an Internet service that would replicate what they sold through the cable companies. They were still not able to take the plunge. Yesterday, after 7 years of delay, they announced that service, called HBO NOW.

Starting in mid April you will be able to get HBO without owning a Pay TV subscription.

HBO knows that people are abandoning Pay TV. To keep growing, they must reach people directly through the Internet.

They sat back and watched as Netflix created a new Internet business model that delivers original series, movies and TV shows completely outside the Pay TV business model. HBO realized they had no choice—either jump into the Internet—or slowly wither away while tied to the Pay TV bundle.

Today, it was announced that Verizon FIOS TV dropped The Weather Channel from its lineup. They replaced it with Accuweather, an application that rides on all screens over the Internet.

This is remarkable—an application has replaced a cable network within a Pay TV bundle. Cable networks believe they can continue to charge the MSOs (FIOS, Comcast, etc.) a lot of money to be included in the Pay TV bundle.   Apparently they did not anticipate that they would be replaced by an app. But that just happened.

As I wrote yesterday, Suddenlink Communications decided that the Viacom channels have become too expensive and dropped them from its lineup. And Suddenlink’s net income went up.

We have three seemingly disconnected events. Yet, they are all connected.

  1. A profitable TV subscription channel launches a replication of its TV service on the Internet.
  2. A major Pay TV provider drops a major cable network and replaces it with an Internet application.
  3. A small MSO eliminates a large suite of channels from its basic cable offering and does not miss a beat, because people stick with them to get broadband Internet access, (a business with very large profit margins).

The Pay TV bundle grew over decades as cable channels were created and legacy media companies like Viacom were built into juggernauts. In order to be current, to be informed, and to be entertained, you had to buy cable. In order to get HBO, you had to get cable. No more.

Between the end around of HBO, the pull of You Tube, the attractions of Netflix and the proliferation of applications that feed my phone or my TV, the Pay TV bundle steadily loses its value.

Cable networks must learn that they either go directly onto the Internet or risk being dropped and replaced within the once magical bundle.

The Internet unravels these channels much as it destroys all existing business models,

“Gradually, then suddenly.”

About Chris Dorr

I consult with companies on digital media strategy and business development. Clients include Samsung, MTV Networks, Tribeca Film Festival, Shaw Media and Canadian Film Center. I created the Future of Film blog for Tribeca. I have worked in the movie business for Disney Studios, Universal Pictures, Scott Free and in the digital media business for Intertainer, Sony and Nokia. Contact me at chris@digitaldorr.com or follow me at @chrisdorr
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