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Xbox Edges Closer to Disrupting Cable TV

· September 19, 2012

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Several months ago, I discussed the disruptive impact Microsoft’s Xbox could have on the traditional cable TV market.  Well, it looks like this scenario is moving one step closer to being a reality, as Microsoft today announced the hiring of the onetime president of CBS Television Studios, Nancy Tellem.  As Tellem said:

“What’s so exciting about this opportunity is we’re looking at the next iteration of television… We’re starting from scratch and we’ll be looking at linear and interactive content, both longer-form, like television, and shorter form.”

Although Yahoo tried and failed in a similar venture 5 years ago in hiring former Warner Bros. Chairman Terry Semel, the timing of that effort likely had a lot to do with its failure.  Yahoo may have simply been ahead of the curve, as the LA Times reports:

Many observers have said that Semel and Braun’s media-focused strategy at Yahoo may have simply been too early. In the past few years, consumers have become more comfortable consuming entertainment on digital devices.  Earlier this year, Microsoft disclosed that Xbox 360 owners spend more than half their time online watching video and listening to music, not playing video games.

With more than 3 times as many subscribers as Comcast, Xbox is in prime position to shake up the cable industry because the device is already in so many living rooms and people are getting used to using it for more than just video games (and my guess is that Yahoo and its enterprising new CEO Marissa Mayer are not going to cede the Internet-delivered content space to its Redmond rivals without a fight). This is exactly the point I was making in my prior post on the subject:

A key principle of disruptive technology is that the original supply does not equal the market demand.  Disruptive companies take the Field of Dreams approach to innovation: build it and they will come.  They anticipate and shape future demands.  Even though video and Internet integration are secondary features on the Xbox behind video games, customers’ preferences will evolve.  As an increasing number of families rent movies, play their own multimedia and watch TV channels through their Xbox, while also playing video games and browsing the Internet, more and more will begin to see the device differently.  As consumer demands evolve, the demand for video options on Xbox will increase and content providers and sports leagues will eventually be forced to give Xbox users the same programming options that they give to cable companies.

As cable companies scratch and claw to retain their “subscription TV” business model, the rest of the content world moves towards an on-demand, Internet-delivered content model.  At some point, the video content delivery industry will look a lot more like iTunes delivered over the Internet via an Internet connected TV (or a video game console that “enables” Internet connectivity) than it will resemble the cable model of today.

[As an aside, the cable industry’s arguments against a la carte programming (similar to the current pushback against Internet video) options sound similar to the music industry’s arguments a couple years back against the iTunes requirement to offer singles of all songs.  Customers should pay to subsidize the bundle [album] because they receive benefits of choice that they are not aware of… oh yeah, and it’s “killing the industry.”]

By the way, Microsoft is not alone.  Amazon has created its own studio and has several original shows in the works.  And, not to be outdone, Netflix is also investing heavily in its own original content, including a new season of the cult comedy hit Arrested Development and House of Cards, a contemporary American remake of the popular BBC hit.  And Netflix is getting more popular by the day, although, as USA Today points out, the company may likely face a backlash from their more traditional competitors:

But Netflix’s licensing bill could climb even higher, if TV and movie studios interpret the growing streaming viewership as a threat to the revenue they reap from advertising-supported entertainment bundled in cable-television packages.

In the market for video, high-quality content is king. And the better content you have, the easier it is for you to dictate the terms of the distribution. That’s why exclusive deals with networks like ESPN, local cable sports channels (they have the home team!) and HBO are so prized by cable companies and, conversely, why cable companies are having to up their payments to sports channels and offer HBO generous business deals. In economic parlance, diehard sports fans and Game of Thrones aficionados have more inelastic demand curves than consumers of other video content (say the Home and Garden network).

As a result, cable companies work hard to make sure you can’t get access to their content without a cable subscription, unless you live in Norway, where one HBO spokesman offers a surprisingly frank explanation of why HBO only offers standalone HBO over the Internet in Nordic countries:

Each market is unique and HBO approaches each one with what we consider to believe the best business model specific to that territory… Scandinavia is a market where HBO doesn’t have to protect an entrenched business model as lucrative as the one in the U.S., where a standalone product would jeopardize its deals with distributors from Comcast to DirecTV.

However, as other modes of video distribution gain in popularity, it will be harder for networks like ESPN and HBO to resist offering their content over Xbox (without strings attached) and Netflix.

But as Xbox, Netflix and Amazon offer more original content more people will be willing to cut the cord thus making non-cable affiliated distribution more enticing to the remaining high-quality content producers who will have to offer their products to those services at some point (or offer it themselves a la carte over the Internet to compete directly with them, especially as Internet enabled TVs rise in prominence).**  We appear to be at the beginning of this positive feedback loop.

It may sound weird right now, but Microsoft and Amazon Studios may be the Paramount and MGM of the 21st Century… or at the very least, they will make the old guard more aggressive in their willingness to adopt the Internet as a major distribution platform.

**N.B.:  You may be thinking, “doesn’t HBO offer its shows on Netflix?  Doesn’t ESPN offer programming on Xbox?”  Well, HBO shows on DVD are available via Netflix because copyright law does not allow HBO to dictate how someone (lawfully) uses its DVDs after they are purchased.  For its part, ESPN offers some content on the Xbox, but only if the subscriber has a cable TV subscription already.  In other words, neither is doing anything that would upset the existing cable subscription model.

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.