LYNCH COMMENT: How television is disrupting the net

Posted on: Tuesday, 7th July 2015

Tonight, about four million Australians will watch the deciding match of the 2015 State of Origin rugby league series on broadcast TV. That is about one in six of the maximum possible audience—all watching one broadcast from one outlet.

A slightly higher number—about five million Australians or less than one in five—live in a household which pays for subscription television, despite the massive expansion of free to air channels from five to effectively 24 in recent times. After just a few months of Netflix’s Australian operations, about 1.3 million Australians—about one in 19—live in a household which subscribes to a streaming video on demand service.

Who says plain old television viewing is dying? Old-fashioned, passive narrative-based entertainment and sports programming goes from strength to strength.

As American media commentator Michael Wolff points out in his new book “Television is Television—the triumph of old media in the digital age”, it wasn’t supposed to be this way.

Digital media would inevitably subsume old media’s revenues and methods. It has simply destroyed them in the case of classified advertising and recorded music, or more curiously, left them rather unscathed in the case of video and TV.

As the blurb to his book points out, “twenty years after the Netscape IPO, ten years after the birth of YouTube, and five years after the first iPad, the Internet has still not destroyed the giants of old media. CBS, News Corp, Disney, Comcast, Time Warner, and their peers are still alive, kicking, and making big bucks. The New York Times still earns far more from print ads than from digital ads. Super Bowl commercials are more valuable than ever. Banner ad space on Yahoo can be bought for a relative pittance.”

“We all know that Google and Facebook are thriving by selling online ads—but they’re aggregators, not content creators. As major brands conclude that banner ads next to text basically don’t work, the value of digital traffic to content-driven sites has plummeted, while the value of a television audience continues to rise. Even if millions now watch television on their phones via their Netflix, Hulu, and HBO GO apps, that doesn’t change the balance of power. Television by any other name is the game everybody is trying to win—including outlets like The Wall Street Journal that never used to play the game at all.”

NETFLIX: Wolff points out that the sexiest OTT player of the moment, Netflix, began life as a mail-order DVD distributor. Its great masterstroke was to re-define itself as a third distribution outlet for television—creating the new category of streaming video alongside existing free and pay TV cable options. Only a few million Americans go to see a movie every day, Wolff points out. 40 to 50m Americans watch TV re-runs every night. Netflix positioned itself right in the middle of a mode of existing consumer behaviour. And now it apparently accounts for more than half of all American data traffic every evening.

Yet as Wolff points out, Netflix is hailed as a “television industry killer.” It isn’t. It is merely the flagbearer of a trend which sees television disrupting the Internet.

iiNet CEO David Buckingham has been mocked by some in recent days for his alarm over how the streaming video data growth had exceeded all previously seen industry usage trends. He even inferred that Netflix may have added several hundred terabytes to data demand within months of its launch. Surely, the critics say, he could see it coming?

But the whole telecom industry has operated broadband nets on a completely different paradigm, the same one which defined voice and cable television before it: scarcity and the technological solution to it, which takes the form of network contention. Money was made on the services sold but not used as well as on elastic peak and cap-based pricing.

What has changed? Well for start, artificially-created retail competition via regulatory diktat has forced a race to the bottom, especially as formerly Telstra and now NBN inputs into retail broadband services render them comparatively monochrome. In order to maintain some differentiation and competitiveness, key applications such as Netflix are no longer included in data caps and are thus not priced according to their cost, even as they consume more and more bulk data.

Network provision is also intended to be separated from retail service provision, introducing the pathogen of negative synergy.

The nature of video streaming traffic—which requires a minimum constant bit rate measured in megabits– is very different to the bursty nature of prior forms of dominant net traffic such as web surfing, faster-than-realtime downloads and low resolution video.

Even the bandwidth evangelists who dominated Conrovian NBN rhetoric in the first half of this decade reflected the old paradigm. While they were busy smacking down the sobriety of this publication and others in regards to their wild forecasts of gigabit revolutions, the fine detail of their pricing and product sets showed otherwise,

The so-called Connectivity Virtual Circuit Charge—effectively a congestion or contention tax– was originally priced at $20 per megabit and kicked in after just 50 kbps of usage. This was considerably higher per bit than the Access Charge pricing, which for a gigabit retail plan fell as low as 15c per megabit and for Point of Interconnect charging which was priced as low as 10c per megabit. The CVC, even reduced now, is clearly a windfall revenue construct that induces retailers to choose between “budget” and “premium” network provision.

At a relatively high contention scenario—say 1 in 100 which was typically the dimensions of a dial-up or a DSL network—CVC charging might only add a dollar or two monthly to individual subscriber costs. But for a more modern paradigm reflecting business usage, or heavy residential video usage reliant on a committed bit rate of 2 megabits or more to each customer that monthly impost might rise to $40 or much higher.

CONTENTION CHARGES: Clearly NBN’s pricing and dimensioning constructs no longer work for a market where video streaming appears to be the number one generator of consumer data demand. Not only does the CVC need to come down but its arbitrary megabit per month construct probably should add a Megaport-style “burstable” or “temporary provision” product reflecting events such as, say, the annual day that Netflix dumps ten new episodes of House of Cards online. Television again disrupts the internet, not the other way around.

And it will keep on disrupting the internet as the smart money figures this out. Lots of money has poured into digital media firms that have yet to realise much in the way of real financial results. As Wolff points out, Buzzfeed’s 150m users generate more or less the same annual revenues as New York magazine’s 400,000 readers. Google’s $US66 billion global annual revenues sound impressive until one realises this represents less than 14c a day per user of revenue. Facebook generates less than 3c a day. Interestingly, Facebook sees video as its future.

The mainstay of much online digital media is advertising revenue and a surplus of inventory, click fraud, programmatic advertising techniques, SEO gaming and poor brand loyalty have conspired to bring typical revenues down to as low as a few cents per thousand impressions. Wolff claims the costs of securing these impressions is fast outpacing the rewards for them.

Meanwhile, the visual entertainment industry rolls on—cinema admissions in the US alone netted over $US10 billion in revenues in 2014, broadcast television $48 billion, satellite television $39 billion, cable television $56b, streaming video and VOD providers $7.5b and DVD sales $6.9b. Wolff estimates that margins in the US television industry are approaching 50%. That is all in the US alone. Broadband merely adds to distribution options and, singularly among content creators, it is TV and movie companies who have figured out how to successfully monetise direct users online.

And that, perhaps, is how the typical telco should now see itself. As a video distribution platform which needs to cost and price itself accordingly.

by Grahame Lynch

Television is the new Television by Michael Wolff is published by PenguinRandomHouse

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