When Steve Jobs was trying to get iTunes off the ground, he approached the record labels with a dire message: Your business model is beginning to decay. Consumers, thanks to pirated content made available by the likes of Napster, no longer valued music like they once did and were unwilling to pay $15-$20 for a CD, when all they wanted was one song.
Align with me, he told them, and sell songs a la carte. Otherwise, you’ll become irrelevant and, soon, extinct. Jobs, of course, was right. While iTunes and the shift in consumer behavior have hardly been a boon for the labels, resulting in mass consolidation and dwindling revenues, teaming with Apple has allowed many of the larger players to adjust their business models.
Over the years, many just assumed that Apple and cable and satellite television providers would make a similar deal. After all, history is mostly repeating itself, just in a different industry: Consumers, thanks to streaming services like Netflix, are now loath to pay hundreds of dollars for a bunch of channels they don’t watch.
No such deal, however, has materialized, and this failure to remake TV’s antiquated distribution system is responsible for the coming collapse of the cable and satellite companies. Whether it was due to hubris or stupidity, these firms lacked the foresight to learn from the music industry’s failure – or perhaps refusal – to realize that their business models would soon come undone.
This was further crystallized by Disney’s recent announcement that it will pull its content from Netflix and offer an over-the-top service in 2019, as well as make a similar, ESPN-branded offering available sometime in early 2018. Instead of there being a consolidated platform that not only allows consumers to pick and choose the content they want but also enables cable and satellite TV companies to remain viable, a fragmented, direct-to-consumer world has now emerged. The result is a situation that’s worse for nearly everyone involved.
For Apple, it’s a missed opportunity to own content distribution, though given the company’s cash hoard it’s hardly the death knell of their business. The story, of course, is different for the cable and satellite television industry, which will continue to shed subscribers, spelling trouble for the networks, which rely heavily on carriage fees for revenue, especially ESPN.
Perhaps no one, though, suffers more than the average consumer, who now faces a dilemma: Pay a bunch of money for cable and still not have access to the high-quality content on Netflix or Amazon Video. Or cut the cord, which is ostensibly cheaper but getting increasingly expensive given how options have splintered – and still not have access to all the content they want because options to watch live sports are limited.
And that’s what continues to hold the old model together: Live sports. While it’s not entirely clear what ESPN’s standalone, over-the-top offering will look like when it’s finally introduced, we do know that it will not feature NFL or NBA games. Carriage fee agreements with cable and satellite companies prevent the network from doing that.
AT&T’s streaming service, DirecTV Now, solves some of the problems but not all of them, carrying NFL rights holders ESPN, Fox, NBC and, in September, CBS. But packages that include regional sports networks start at $50, so when high-speed internet is included, the total bill could exceed $100. When consumers add Netflix and Amazon Video, the original appeal of cord cutting – cost savings – has nearly vanished.
Granted, other pro leagues besides the NFL, including the NBA, MLB, NHL and Major League Soccer, offer direct-to-consumer packages via the web, but local teams are blacked out due to rights agreements, limiting their value for many would-be cord cutting sports fans. This, along with the stranglehold the networks continue to have on pro football, is what is helping to keep the cable companies in business.
In time, this is likely to change because the tech industry is coming. Amazon reportedly paid $50 million for part of the NFL’s Thursday night package this fall, making the broadcasts available only to its Prime members. It took over for Twitter, which last year paid $10 million. Yahoo! has also streamed the NFL in the past and broadcasts one MLB game a night through its sports app.
As Facebook continues to build out its content offerings, including its recently unveiled Watch platform, it’s reasonable to expect that it, too, could start bidding for high-profile live sports content. (It has already, in fact, begun to test the waters in this area, announcing earlier this month that it will partner with the online sports network Stadium to live stream 15 second-tier college football games this season). And where Facebook goes, Google is sure to follow.
Alternatively, it’s easy to envision the leagues eventually deciding that they don’t need distribution partners at all, choosing instead to pursue a direct-to-customer model, charging a flat fee for access to games and then collecting all the ad revenue themselves. Building this type infrastructure won’t be as big a problem as most might think. After all, MLB Advanced Media, which is co-owned by all 30 MLB team owners, founded BAMTech (which it later sold to Disney), perhaps the internet’s premiere streaming platform, with a client list that includes the PGA Tour, HBO, WWE and ESPN.
Either way, if – or perhaps more precisely, when – the networks lose their grip on sports (specifically, pro football), it will mark the end of the cable and satellite model, once and for all.
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an investment advisory with approximately $625 million in assets under management. Clients and employees of Gerber Kawasaki own positions in Apple, Facebook, Disney, Google, Netflix and Amazon but readers shouldn’t buy anything without doing their own research.
