January 19, 2016

Breaking All the Rules

Two interesting stories caught my eye this past week. The first is that Netflix is now available in over 190 countries, having launched 130 new markets simultaneously during Reed Hastings’ CES keynote on January 6. Netflix is still not available in China, North Korea, or Syria, but pretty much everywhere else is covered. The second, and possibly even more surprising, bit of news is that Apple is considering buying Time Warner, the parent company of CNN, HBO, TNT, and many other content brands. Both of these moves would have been considered certifiably insane just a few years ago, which shows us how much the video industry has changed and how far we still have to go.

Two points:

1. The Media Status Quo is Breaking Down.
As TDG has pointed out on multiple occasions, legacy TV providers compete in a game that has clearly defined rules. Every aspect of the ecosystem, from advertising, Nielsen ratings, and MVPD affiliate deals, to windowing and geographic distribution, has evolved over decades into a system that is highly optimized to maximize earnings for the biggest players. Each of the above deals is wildly disruptive of this system in its own way. The Netflix deal disrupts the status quo because a global Netflix has scale with respect to both content creation and customers. This has never happened before in the history of media. Disney has global scale with respect to a few Hollywood blockbusters, but remains totally dependent on third party partners (pay-TV operators and theatre owners) to get global distribution. Google has global distribution (outside China) for YouTube, but relies on third party content providers to create shows. The only things Netflix depends on are the Internet itself and some form of payment mechanism. Very, very powerful.

Apple’s interest in Time Warner can be seen as a classic competitive response to Netflix’ moves. Apple has global distribution (via both Apple devices and the App Store) and a payment platform (Apple Pay), but doesn’t have any original content capability. Adding HBO (to say nothing of all the other Time Warner Brands) would give Apple full stack media creation and distribution capabilities that have never been seen in a single company. Ever. Apple should do this deal tomorrow, and then sell or spin off those portions of the Time Warner portfolio that don’t add value or make sense for Apple to keep.

2. The Big 5 (Amazon, Apple, Facebook, Google, and Microsoft) Has to Respond to the Netflix Challenge.
A single move does not change an ecosystem, certainly not one as deeply entrenched as the broadcast and pay-TV industry. What individual moves can do, however, is force a response from those players capable of responding. In the case of both Netflix’ global expansion and a possible acquisition of Time Warner (or just HBO) by Apple, the responses are likely to come fast and furious. Amazon, Facebook, Google, and Microsoft each have their own strategies and business models; but none of these companies can afford to just stand by idly while Netflix and Apple transform themselves into media superpowers. The most logical countermoves would involve the acquisition of other unique content assets (i.e. movie studios, broadcasters, possibly even sports teams). Today, such assets are valued primarily on their current ability to generate cash flow within the legacy system, not their strategic value in a totally new global game. As this happens, the remaining unique content assets become even more scarce, and a bidding war ensues. Technology and media companies have been through all this before, of course, with Time Warner itself playing the starring role in its disastrous 2000 acquisition by AOL. Netflix is proving, however, that the old clichés about content and technology being oil and water have likely outlived their usefulness. We’re all technologists now, and that may just make all the difference.

The TV industry is entering into a new era in which both technology platforms and the audience are global. Status quo models the world over are in for a big, big shock.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.

Sign Up for Weekly Analyst Insights

Recent Insights

June 3, 2020 // Lauren Kozak All Together Now

On May 28, Hulu launched Watch

May 27, 2020 // Mike Fischer AR and VR – Back from the Dead

As sure as Gartner’s model predicts

April 30, 2020 // Lauren Kozak The Quibi User Experience: A Millennial’s Perspective

Earlier this week, TDG’s Brad Schlacter