Streaming Music Systems Performance (Infographics)

Two interesting pieces recently.  One on the relative performance of top music streaming options, the other on how those services compensate performers and writers.

Researchers at YouGov BrandIndex looked at a variety of metrics for the top 5 music streaming services in the U.S. They found Pandora to be the dominant player in the field, although Spotify has been making inroads recently.  Pandora has dominant leads in most of the metrics, from number of subscribers to awareness (from both ads and word of mouth).  Spotify's numbers were improving, but the researchers concluded that

"Perhaps the brands with the biggest challenge are iHeartRadio and iTunes Radio. They have reasonably high awareness levels, but do not seem to be getting traction with consumers. The conclusion is that these brands may need to try something different to generate excitement with consumers."

Music streaming services largely emerged as a result of major record companies eagerness to open up a second revenue stream to help cope with declining sales of physical recordings.  Initially, they were eager to license their recordings to streaming services, but faced an initial roadblock - the existing royalty systems employed two distinct approaches.  Royalties for sales were based on fixed compensation for each unit sold, while royalties for licensing music to radio stations was based on a percentage of station revenues (and not directly linked to which music was played).  Conceptually, the radio model seemed closest to how streaming services operated, as well as how audiences used them.  Thus, most of the early deals utilized royalty payments as a percentage of revenues.

As sales in the traditional music markets continued to fade, the record industry wanted more from streamers.  They started arguing that the current system (which they had eagerly negotiated) was "unfair" - largely because streaming revenues were slow to develop.  The attack came on three fronts.
First, that not enough money trickled down to artists and songwriters.  The biggest problem with that argument is the fact that the share that trickles down to the artists and composers is determined by the rights organizations (like ASCAP and BMI) and the actual rights holders (predominantly the record labels), who take their cut off the top.  So the industry argues for a larger royalty rate, of which only a small fraction would actually go to the artists and composers.
Second, streaming services differ from radio stations in that they can and do track individual consumer plays.  There's no mechanism to measure how many listeners hear a song on radio.  The current licensing deal with Spotify calls for royalties to be paid according to a formula that includes both a revenue percentage and the number of streams.  Spotify also pays an additional set of royalties to songwriters and composers for what is termed "streaming mechanical royalties".  As a consequence, Spotify pays a much higher total percentage of its revenues than Pandora.  (Pandora is currently classified as an online radio service, and radio stations are currently not required to pay mechanical royalties).

The third argument is that most streaming services offer a free streaming option, which the music industry argues "cheats" the rights holders because revenues from the ads are less than subscription-based revenues.  The fact that the free/paid proportions for Pandora is roughly 75/25, while Spotify's audience is more of a 50-50 split, also contributes to the difference in royalty payments.  As one record label executive summarized,

"Based on the free model, the payouts we're getting on streaming is so small... The problem that we're running into is Spotify is just not converting users to the paid version quick enough."

That perspective contributed to the fact that the music labels pressured Apple to raise its proposed starting subscription price for the new Beats streaming service (much like the book publishers did for iBook pricing - which the courts later ruled was an antitrust violation).  But the underlying issue is that the record companies want more money, and are using artist payments to engender sympathy.  If artist payments are the real problem, the music industry could solve that easily by granting them a bigger share of the payments they get, or changing accounting practices so that the artist share comes from gross payments, and not what's left after music industry costs (and profits) are covered.

One can look at this situation from the "level playing field" metaphor.  Spotify wants a level playing field by getting the same deal Pandora has, Pandora wants a level playing field with broadcast radio (straight percentage of revenues, and lower percentage), and the music industry wants to raise the height of the field several feet because they cut the grass (i.e. royalties to artists and composers) too short, and aren't making enough profits from their traditional business models.

The current copyright and royalty system is a mess, largely because it was designed to deal with selling physical copies of intellectual property.  The current model has never really worked well with digital reproduction, or with the growing need to replace shrinking sales revenues with licensing arrangements for emerging digital streaming channels.  Add the fact that digital markets are global and have the potential to scale much higher than physical copy sales (tens of millions for hit albums in digital, while in the physical medium heyday, hits sold hundreds of thousands).  Plus, they're now having to deal with younger audiences who care more about access to music than owning copies of music.  In addition, artists need to recognize that the scale differences should be reflected in the setting of royalty fees - and that because digital access to their recordings remain available long after labels drop them, that they'll benefit from their work much longer under digital deals.

The debate and fights over music royalties is likely to continue for a long time, in part because the music industry is trying to hold on to an increasingly problematic business model, and is hoping to find a way to maintain their control over revenues derived from their historic role as the choke point between artists and their audiences.  However, the growth of the digital economy is showing that it doesn't require multiple layers of distributors (and their growing costs) to provide access to products for potential purchasers.  There are already content creators (including musicians) who have discovered that going independent can provide them much higher levels of return, as well as more control over use of their work.  For the big labels, this is a fight for survival; but for society, it's a fight for who gets to control access to content (and who gets to benefit from that).  As for the question of whether streaming will leave artists unhappy - the answer is yes, if the big labels remain in control, and no, if we can shift focus from preserving a declining music industry to how to develop a rights and licensing regime that promotes and protects creation of, and access to, intellectual property.
 
It's time we shifted our concern from protecting the old ways to think about how to develop copyright and licensing systems that benefits the creators and users of intellectual property rather than those who merely reproduce and distribute it.

(For more background, see this post about a digital music licensing panel at the 2014 CES).


Sources: Infographic: Which Streaming Services Are Winning the Battle for Millenial Eardrums,  Adweek
Is the Music Streaming Industry Destined to Leave Artists Unhappy?, Adweek

Bundling vs. A la Carte - Implications

In previous posts I've explained why bundling can be a good marketing and pricing strategy, particularly for certain types of information goods, and why a la carte strategies can be appropriate for networks with certain characteristics and in markets where access can be easily restricted.  I've also made the case that in the early years of cable and multichannel video distribution, bundling was arguably the optimal marketing strategy for system operators, as well as for audiences.  Technological advances and the explosive growth in market competition over the last decade or two, on the other hand, have opened the door for the effective use of a la carte marketing of video networks.  The remaining core question is whether shifting to a la carte is a good strategy for video distributors, networks, and audiences.  I'll try to address that issue in this post.

One of the problems with much of the current discussions of forcing a shift to a la carte marketing is that it's largely based on overly simple, and occasionally inaccurate assumptions.
   The one I've already addressed is the argument that bundling forces consumers to pay for channels they don't want.  The problem with that argument is that a consumer's decision to purchase a bundle of networks from a multichannel distributor is not based on a network by network consideration of value, but on the simpler issue of whether the consumer feels that the aggregated expected value of the channels he or she does want is greater than the price of the bundle; from that perspective, whether the distributor includes unwanted "costly" channels is irrelevant. ("costly" in the sense that the distributor pays for carriage rights).
   A second major assumption (unstated but underlying most discussions) is that the a la carte price for a network would be close to what multichannel distributors pay for carriage rights as part of bundle.  The problem with that assumption is that it oversimplifies the market forces at play, and ignores the economic impact of unbundling.  For many of the 800+ cable networks available in the U.S., going a la carte is likely to lead to a pricing death spiral.

   The problem is that while cable networks in aggregate (i.e. bundled) have been quite successful in attracting audiences (gathering 50-70% of viewing overall (a bit less in primetime), all but a handful of networks attract less than 1% of audience viewing (averaged daily viewing).  Of course, some programming draws significantly higher audiences, and demand for networks may be even higher.  Still, most cable networks are likely to attract substantially smaller number of subscribers as an a la carte offering than the potential audience obtained as part of a bundle.
   For example, the total daypart audiences for ad-supported cable networks in the last quarter showed that only 8 cable networks had overall total day ratings of 1 or higher.  Weekly primetime numbers for top networks can be 2-3 times higher, and certain episodes or events (primarily but not exclusively sports) can draw ratings of 10-15.  Actual demand for a channel marketed a la carte is likely to be higher than that (as it's aggregating across shows and over time), but is also likely to be highly price-sensitive.  Even if a cable network could get a 50% buy-in rate as an a la carte offered at the current bundled carriage rate, that would result in a 50% decline in subscription revenues for the network.  (That's one reason pay-tv network subscription prices are in the $15/mo range, while carriage rates for cable networks top out around $5/mo, and most are under a dollar.)
  However, that's not the only impact of shifting to a la carte.  Most cable networks are also supported by advertising.  While a network would likely keep most of its core viewing as an a la carte offering, it would lose the occasional or drop-in viewers, which would have some negative impact on revenues.  More critically, though, is the fact that many national advertisers prefer to buy spots on networks that have a potential reach of 80-90% of the national population.  Few cable networks are likely to reach that goal as an a la carte service without significantly discounting subscription prices.

Unbundling cable networks is likely to have significant negative impact on revenues for all but a few channels.  Those where losses are small are likely to be channels with established record of high-value content, and a fairly broad audience base.   Those channels whose value lies in a narrow niche are likely to find that unbundling will drastically cut their revenues, forcing them to choose between significantly hiking a la carte prices or cutting back on programming costs.  Either of those responses put the network on a potential death spiral where demand (and revenues) continue to shrink as networks try to cope through price hikes or cost-cutting in content.

There is one additional implication of shifting from bundling to a la carte.  Multichannel video distributors face significant costs in building and maintaining their distribution infrastructure.  Those costs need to be recouped through subscription fees.  When the subscriptions are for bundles with a large number of, the per-channel distribution costs are fairly low.  If consumers shift from a large number of channels to only those they are willing to pay for separately (the goal of a la carte), then those distribution costs would have to be paid for separately, or split among the smaller number of channels subscribed to.  In the first instance, that would mean that a multichannel distributor may place a surcharge on access, regardless on how many or which networks are subscribed to.  The alternative is to split distribution costs across the channels; meaning networks would have to pay for their distribution, or add distribution costs to their a la carte prices.  In either case, that's more negative pressure on revenues and demand.

The upshot is that unbundling will result in significantly lower subscription numbers for most, if not all, cable networks.  The lower buy rates will negatively impact both subscription and advertising revenues compared to the current bundling market option.  If networks need to maintain current revenue levels, they're likely to have to significantly boost the a la carte pricing, or drastically cost the price (and consumer value of) their content.  Either strategy could easily result in a death spiral of declining audiences leading to price-highs and cost-cutting, leading to falling demand and audiences, etc. until the network proves to be no longer economically viable.

The "death spiral" problem is aggravated by the fact that there is a new TV distribution system available.  Online video delivery is becoming widely available as broadband Internet access increases.  Over 70% of Internet users already watch online videos, and streaming services like Netflix, Hulu+, and Amazon offer access to a vast archive of current and older TV and movie content.  The TV consumer faced with the issue of whether to purchase, say, Turner Classic Movies channel is not only thinking about whether that channel is worth purchasing, but the value of TCM vs. AMC vs. USA vs. CNN vs. a Netflix subscription and a plethora of free online content.

  Already several million US adults have become "cord-cutters", dropping some or all of their multichannel distribution services in favor of accessing their TV and movie content through online streaming services.  If unbundling drives channel prices up and forces consumers to be more rational in their purchasing of subscriptions to access cable networks, this could trigger a move of consumers to online video.  That move may well be followed by a move  by networks finding a less costly - and more flexible - distribution system that allows more viewer interaction, better usage metrics, and greater capacity for price differentiation.

If unbundling is bad for most cable networks, it's got to be good for consumers, right?  After all, a lot of the political push argues that it's in the consumer interest.  The reality here is that unbundling is likely to result in consumers paying higher prices for significantly fewer channels.  The problem is that bundling acts as a form of cross-subsidization as well as a form of risk aggregation.  When value is uncertain, aggregation through bundling spreads that risk - moving the the consumer from "I'm not sure that program/network is worth the price charged" to "It's likely something in the bundle is worth the price."  Bundling spreads distribution costs across more networks, reducing per-channel costs.  And from the consumer perspective, buying a bundle of channels you're not sure you want while getting those you do essentially subsidizes access to those added channels.  Previous efforts to remove subsidies in cable (the 1992 Cable Act) actually increased prices for most cable subscribers, rather than reducing them, as the politicians and interest groups pushing for the Act claimed.  In telecommunications, cross-subsidies usually are based on high-demand & high-value services subsidizing low value and low demand services.  In this case, it's ESPN subsidizing The History Channel; not the other way around.

Even if the subscription prices of channels don't increase, consumers are likely to reduce the number of channels they will subscribe to. Rather than "bundling forcing consumers to buy channels they don't want," unbundling means that consumers will be able to not buy the channels they don't want.  Audience research shows that for most consumers, almost all of their viewing is confined to 5-10 channels.  Another factor suggesting reduced channel access can come into play when there are multiple channels or networks in a content niche.  If the consumer perceives overlapping value across related niche channels, then the purchase decision is based not on the total value of the additional channel, but the added value that channel is likely to generate above that available in channels already in the a la carte subscription basket.  That makes it much less likely that the consumer will purchase complementary channels, or multiple channels within a content niche.  At least not without some significant cross-subsidy of channel prices. 
  So rather than having access to 100s of channels via bundling, it's likely that most Americans would scale back to 5-10 channels, perhaps with occasional video-on-demand purchase of high-value content.  Gone would be the opportunity for serendipity and the opportunity to sample and establish value for innovative networks and programs.  Thus, unbundling, along with the removal of possible subsidies, is likely to negatively impact general social welfare.  In fact, that's the long-established argument for public broadcasting.
  To illustrate, a consumer who has a low to moderate interest in news is much more likely to subscribe to a single news source than to subscribe separately to multiple news networks offered a la carte.  It's generally given that relying on multiple news and information sources is more valuable than relying on a single source - but a la carte models reduce the likelihood of multiple subscriptions, as the added value of additional news sources decreases as the number of sources goes up.  (When content overlaps, the consumer will base a purchase decision on the added value the additional channel will bring, rather than the full value of the channel.  Thus further decreasing demand for multiple channels within a niche).  I'm sure that most liberals would be upset if Fox News Channel was the only cable news channel subscribed to, just as most conservatives would worry if MSNBC was the only cable news network many people subscribed to.
    In addition, the impact of increased costs will hit lower income groups more than others.  Lower income groups are likely to cut off a la carte subscriptions once their separate subscriptions reach a point where the channels provide a threshold level of content, particularly if the addition of other channels provide minimal incremental value.

So, a complete unbundling and a shift to a pure a la carte marketing approach is likely to have a significant negative impact on all but the biggest high-value cable networks, and be particularly problematic for networks with content of lessor or unknown value, and those targeting small niche audiences.  It's quite likely to increase access costs to consumers (both on a per-channel and aggregate level), and result in their reducing access to networks and content of low or uncertain perceived value.  Not only is this a negative consequence for the consumer, but the reduction in access brought by a pure a la carte marketing approach is quite likely to have meaningful negative social impacts as well.
  It would hurt multichannel distributors as well, impacting the cost and profitability of their multichannel video services, and accentuating their competitive disadvantage as a TV distribution system vis-a-vis online streaming.  The eventual certainty of competitive disadvantage in that field has been recognized by the industry, and is one reason why much of their focus is shifting from multichannel video distribution to becoming a digital telecommunication access point and service provider.

Let me end by saying that a look at the likely impacts of a shift from pure bundling to pure "a la carte" model for multichannel video distribution suggests that there will be serious negative consequences for most groups in the market.  But it's not necessary to completely shift from one extreme to another.  The growth of video-on-demand (VOD) is demonstrating that a la carte can be a viable option for some networks.  The explosion of carriage fee rates for some networks - regional and nation sports networks in particular - suggests that splitting related niche networks and channels into separate mini-bundles, possibly with some a la carte options, would be appropriate and even have a positive impact on consumers and networks, letting the high costs of those channels be born more directly by those that see that value.  (And also hopefully bringing bundle prices back down to where multichannel access, and the social values associated with maximal access, are maximized.)

The market and technology is a a point where a la carte marketing of networks and channels is viable, and where it makes sense for some types of channels.  The same can be said for the intermediate strategy of offering various mini-bundle mixes of channels, programs, and services.  However, there are still a large number of channels, networks, and services where bundling remains the optimal approach, from consumer, network, distributor, and social perspectives.  It's pretty clear that rushing into a overly simplistic "bundling is corporate evil so a la carte must be consumer-friendly" assumption is not a reasonable foundation for policy in this area.  This is an area where an incremental approach that considers what marketing approach is best within a specific context; where consideration is given to the type of content and its content as well as audience interest, social welfare, and the values inherent in having the content accessible and used.  That's the approach most likely to result in positive outcomes.

Bundling vs. A La Carte in TV Markets - History

Yesterday, I provided some insights from economic theory of information in terms of when bundling can be preferable to "a la carte" marketing of TV channels and networks by multichannel video distributors.  The essence was that bundling is actually the optimal strategy for the context of early cable systems and consumers, and has some ancillary social benefits as well.  "A la carte" offerings (in economics terms single-use pricing), may work well in other conditions, and the TV marketplace and distribution technology is moving towards those conditions.

Today I want to explore that transition through a historical look at TV market economics, and how that has shifted over time.  Tomorrow I'll look at what going to a la carte will mean for today's networks/channels, multichannel distributors, and TV consumers, from a business/economics perspective.  To start, let's look at how networks generate revenues from a historical perspective.

  In the U.S., the predominant revenue source for stations, networks, and distributors comes from a mix of audience-based sources.  For broadcast stations and networks, the primary revenue source comes from advertising, and the amount of revenues an advertisement generates is based on the audience attracted.  Historically, broadcast stations who were network affiliates were also paid a fee for carrying network programming, but the amount was, again, based largely on the station's potential audience.  Early cable systems were basically redistributors of TV station signals, and the cable system's revenues were tied to the number of subscribers it could attract (i.e. audience size). 

  When cable networks and channels emerged, they followed one of two basic business models - looking for advertising for revenues, or a subscription-based approach.  The subscription model, Pay TV, used a strategy of offering new, and high-value, content not otherwise available to TV viewers in the market, and revenues were directly audience-based (i.e., the number of subscribers).  Ad-supported cable networks were miniatures of the broadcast network business model, with revenues based on their ability to attract and retain audiences.  These soon discovered that having a focused programming strategy (call it targeting, filling a niche, or branding) gave them a competitive advantage over broadcast networks for the audience segments that valued that type of content more highly.  The broadcast networks offered such content occasionally, but the cable network could be a place where viewers could find it all of the time.  Targeting also had an advantage in the sense that advertising on niche networks were more valuable for those advertisers who wanted to reach that audience segment.  Now there are a few cable networks where the revenues come from sources other than subscription fees or advertising (PBS, C-SPAN, shopping channels, religious networks), but those are still indirectly audience-based in the sense that the funding is based on their programming being able to reach an audience. Bundling allowed cable systems to combine and aggregate the niche audiences by taking advantage of the different mix of high-value networks across audience segments.  Bundling increased the value of, and demand for, the bundled mix of networks, allowing cable systems to increase both subscription fees and the number of subscribers.

Revenues are only one side of the business model - the other are the costs of operation.  For broadcast stations, networks (broadcast and cable), and cable systems, there are two basic costs - the cost of the programming and content, and the cost of distributing that cost to audiences.  The distribution costs for stations is tied to transmission capability, and increasing signal reach is costly.  For networks, they need to find a mix of broadcast stations and/or cable systems to distribute their content for them.  In the early stages of TV, that meant paying stations or cable systems for carriage, with the larger the potential audience pool the more valuable the distribution channel.  Distribution costs for cable systems were substantially different - cable operators face the very high fixed costs of building out the physical distribution network, with very low variable costs.  For them, the key was not building raw audience numbers, but in increasing the percentage of homes past that subscribed.  That brought the marginal costs per subscriber down to affordable levels.
  Turning back to programming costs, there is a general rule of thumb that programming costs correlate with audience popularity (i.e., are more likely to have a high value to some set of consumers).  Historically, broadcast TV markets were constrained in terms of both the number of competitors and in their ability to reach viewers in the market - so the only area open for competition within the market was in terms of the programming content offered.  Competition tended to drive programming costs up.  When cable sought entry, they needed to compete with the existing broadcasters, and the way they could was to offer signals and content that was not easily available otherwise.  In the early years, that meant paying to bring new channels, networks, and content into their market.  There was the added incentive that bringing in more valued networks and programming content increased the perceived value of the cable subscription bundle and allowed cable systems to increase subscription fees.

Things changed as technology opened markets and the newer networks began to establish their value in the TV marketplace.  As TV markets expanded in terms of viewing options, three things happened.  First, cable networks largely went niche.  They didn't have the resources to compete head-to-head with the broadcast networks for general interest programming and audiences.  Going niche let them access lower-cost programming options, yet benefit from the higher advertising value of their audience segment with some advertisers.  As multiple niche networks pulled off segments of the general interest audience, viewing of the big broadcast networks dwindled, impacting their ability to generate advertising revenue.  The third result is that some of the niche networks developed their brand identities and established their value to the point where having those networks as part of your channel bundle became essential for cable systems.  That let those channels switch from having to pay for coverage, to having cable systems pay for their network signals.  They had established such a strong expectation of value for their content among a large enough segment of audience, that carriage was mandatory.

The shift in viewing and advertising impacted revenue growth for broadcasters and networks, yet competition drove programming costs ever higher.  As a result, everyone started looking for new revenue streams - and carriage fees looked like a viable option.  However, as more stations and networks sought to take advantage of this potential revenue stream, those costs were passed on to multichannel video subscribers, increasing the costs of the bundle.  In most cases, the added revenues were not used to increase the value of the programming offered (and thus the value of the network to the viewer), but as a replacement for lost advertising revenue.  Increasing price without increasing value will inevitably reduce demand for the network, and lower demand results in smaller audiences - particularly in ever-more competitive TV markets. 
  One factor compounding this is the growth of online video options, many of which combine access to high value content with pricing models well below those available from multichannel video distributors.  Another is the fact that eventually the value of carriage fees will ultimately be captured by the owners of the content rather than its distributors (the fee depends on the ability of the copyright owner to limit access rather than any unique aspect of the distribution channel).  Finally, as competition in the marketplace advances to the point where most content is available over multiple sources and viewing options, stations, networks, and distributors are finding that having sole access to high-value content is a critical form of competitive advantage.  This is the reason why so many networks and distributors are focusing on delivering unique content (not available elsewhere), and why bidding wars are escalating for reliably high-value programming like sports and major cultural events.


From an economic perspective, what this means is that in an increasingly competitive TV marketplace, players are increasingly looking for carriage rights fees as a revenue source, and towards developing a (niche) brand that emphasizes high-value content as a way of increasing demand and value for their outlet.  The bidding wars for high-value content drive programming costs higher, and unique content increases the value of the station/network to distributors, allowing stations/networks to try to increase carriage fees collected from distributors, in part to cover the increased programming costs.
  Increasing carriage fees mean that the cost of existing bundles is increasing.  If the fee increase isn't matched by increased perceived value of the bundle, that will eventually lead to a reduced demand for the bundle.  If the multichannel distributor persists in the bundling tactic, eventually price increases will hit a point where the cost of the bundle exceeds the bundle's perceived value by a sufficient number of consumers to trigger a fall in subscriptions.  There are increasing indications that we're nearing that point in the U.S..  In particular, there's a growing awareness that the bidding wars for sports rights among a growing number of sports-niche channels is driving big jumps in carriage fees and forcing many multichannel distributors to start thinking about pulling sports networks from the basic bundle, and marketing them as a mix of mini-bundles of sports channels and/or a la carte offerings.
  Establishing a reliable brand - in other words establishing a more consistent level of expected value for content - is critical from a consumer demand perspective.  As mentioned yesterday, a key advantage of bundling for consumers is that the consumer can mitigate for highly variable and uncertain expected value for content by aggregating across multiple channels and over time.  When value is uncertain, it depresses the likelihood of purchase.  Aggregating across multiple options means that instead of wondering whether a single program or channel is worth purchasing, the consumer only needs to consider the likelihood that among the bundled options is enough value to justify the purchase.  So, if offered a la carte, the consumer's decision shifts to the question of whether they'll receive value in excess of the price they pay for that specific content or channel.  This works best when the content is known, high-value, and where such value is relatively consistent across the content offered.  That's pretty close to the goals of branding.
  Changing technologies are also enabling the other key feature needed for single-use pricing to work - the ability to collect payments and restrict access to the content/network to those purchasing. The growth in pay-per-view and video-on demand offerings from multichannel distributors amply illustrates the technological capacity to offer networks on "a la carte"basis.  The growth in niche branding and the success of many channels in building brand value among audience segments similarly demonstrates that, for some networks or channels at least, viewers may have a sufficiently developed idea of the expected value of a network and its programming options to facilitate "a la carte" purchase decisions.  The continuing evolution of the TV marketplace looks to be providing a context where single-use pricing models may be viable and practical. 

In essence, the transition from broadcast local markets for TV to global, digital, highly competitive marketplace is leading to a situation where bundling is becoming less optimal, and a la carte network marketing is becoming increasingly viable, at least for some networks and channels.  While much of the clamor for a switch is politically motivated, the reality of the current TV marketplace is that the ability of multichannel distributors to engage in "a la carte" marketing models for (some) networks is becoming increasingly practical.  Additionally, the growth in carriage rights fees is making the idea of a single basic bundle increasingly unaffordable and unsustainable as a marketing approach.  The disparity between the growing bundle price and the online video distributors' significantly lower prices is causing many TV viewers to re-evaluate their TV viewing habits and shifting their viewing preferences to lower-cost alternatives.  (A phenomenon known as cord-cutting.)

While the early technology and market structure of TV program delivery provided a viable foundation for developing and supporting bundling as a marketing and pricing strategy for cable, the evolution of the TV marketplace (and technologies) is reaching a point where a la carte marketing strategies are becoming practicable.  And for some (but by no means all) networks, a la carte marketing structure might be preferable.

But is switching to a full a la carte marketing model a good idea?  A lot of that depends on what will be the longer-term impact of a switch, particularly if competition, and programming costs, continue to escalate.  I'll address that next.

Newspapers' Online Paywalls Show Promise?

One of the metered access (paywall) platforms available for newspapers is Press+, which has released some data on the 400-plus publishers using their platform.  The numbers suggest that these paywalls are modestly successful - at least to the point where publishers are increasing subscription rates and reducing the number of "free" articles they make available before users hit the pay wall.  They report that the average price for a monthly subscription has risen from $6.66 in July 2011 to $9.26 at the time of the survey.  The number of "free" articles averaged 13 in January 2012, but has dropped to 10 in the latest report.  In addition,The company suggests that rather than seeing online readership drop, publishers are feeling confident enough to push the business model for additional revenues.

What’s more, according to Press+ co-founder Gordon Crovitz, publishers are enjoying the benefits of increased circulation revenue without sacrificing any online advertising revenue; however Press+ didn’t release any figures on this score.

While this news might be encouraging, the research methodologist in me has to throw in a lot of caveats.
First, the release actually provides no numbers with respect to online ad revenues (as noted in the quote), subscription revenues, or subscription (circulation) numbers.  Thus, there is no direct evidence provided in the report that online news paywalls are financially successful.
  Second, there's a line in the report that the numbers are based on a survey of Press+ customers - but there's no indication that the same publishers participated in the surveys at the various times that numbers were reported from. (For example, the rise in "average" subscription may be the result of fewer responses from publishers with lower subscriptions - who might also have dropped their paywalls).  As such, its not clear the comparisons over time are valid.
  Following up on that, I'll also note that the comparisons are aggregate - the survey apparently didn't directly ask respondents if they changed subscription prices or where the pay wall kicked in.  (Or if in fact they did, the failure to mention that might suggest that those results weren't so rosy).
  Finally, I'll note that even if the sample of Press+ publishers was random, the responding publishers are limited to Press+ customers, and thus are not necessarily representative of online newspaper publishers  more generally.  As such, any results are not generalizable.
  As such, I'd say the story jumped the gun with the headline "Paywalls Pay Off,"  The results reported don't justify that conclusion.

  For many of the same reasons, you shouldn't infer that the issues with this report suggest that paywalls aren't successful, either.  Anecdotal evidence suggests some are - for example, the NY Times seems to be doing well on their current paywall approach (after several glaring failures).  On the other hand, News Corp. recently closed down their paywall online newspaper, The Daily, citing low readership and high losses. 
  In spite of my caveats with respect to these specific numbers (and improper conclusions), I'll take this report as being in line with my own cautiously optimistic perspectives.  That is, pay walls can be successful - particularly when publishers provide unique content of clear value to some set of users - but are less likely to be successful with generic news coverage that is widely available elsewhere.

Source -  Publishers Raising Digital Sub Prices, Paywalls Pay Off,  MediaDaily News.

Scripps - Amazon Licensing Deal

The recent success of audio and video streaming services is opening up a new source of licensing revenues for content producers and owners.  Scripps Networks is testing the waters with its first online-only licensing deal, with Amazon's subscription-based video streaming service.  By the end of this week, shows from Scripps' top channels - HGTV, Travel Channel, and Food Network - will be available through Amazon's Instant Video service.  For now, access will be limited to shows from previous years will be available.

"The risk Scripps wants to be careful about is to make sure that it (online subscription deal) doesn't take away viewers from its current shows. The advertising dollars are from its current programming on pay TV, that's the main source of their revenue," (Morningstar Inc analyst Michael Corty) said.

 Comments in earlier announcements suggest a similar deal with Netflix may be in the works.

Source -  Scripps Networks signs content licensing deal with Amazon,  Broadcast Newsroom

CBS makes News

The latest quarterly report on CBS's financial health showed gains from the tail end of 2012 political advertising, and growing retrans fees from their O&O (owned and operated) broadcast TV stations.

  Total revenues for CBS were up slightly (2%), sparked by a 3% increase in advertising revenues.  However, the gains were centered on their broadcast station operations, rather than the national TV network.  Upfront sales for the network's 2013 Fall season fell below expectations, showing only a 9% increase over last year.  Political advertising went primarily to their O&O TV stations.  Still, advertising revenues were the leading income sector for CBS, earning $2.4 billion in the fourth quarter of 2012/

  Licensing and affiliation fees are becoming a major revenue source for CBS, coming in at $1.98 billion. CBS said O&O retrans fees were on track to reach $500 million; cable network affiliation and subscription revenues up 8.6% to $505 million, while revenues from content licensing and distribution deals (primarily with Hulu and Netflix) dropped 6.6% to $25 million.
  CBS's outdoor advertising business saw steady revenues, at $340 million for the quarter.  CBS said it was sticking with plans to sell off its international outdoor advertising business as opportunities presented, and restructure the US outdoor business as a real estate investment trust.

  In a separate announcement, CBS said it was expanding its interest in cable networks by becoming a minority partner in Mark Cuban's new AXS cable network.

Les Moonves, president/CEO of CBS Corp. stated: “This is an innovative way to use our tentpole programming to gain more ownership in the cable network business. AXS TV will now serve as a terrific complement to our existing broadcast television entertainment programming.”

Details on the proposed deal were not revealed at the time.

Sources - Moonves: CBS Revs, Retrans Fees Up, Cable Fees Rise 9%, Media Daily News
CBS Buys Into Cable, Secures Stake in Cuban's AXS,  Media Daily News

Ready for the New Year?

I'm back from a bit of a break, but the ever-evolving world of journalism and media just kept piling up those changes.

Here's some highlights -

Nielsen bought out Arbitron (pending DOJ approval), further consolidating the broadcast ratings world.
 - Nielsen/Arbitron Deal Sparks Concerns Over Competition, Supply of Ad Market 'Currencies',  MediaDailyNews

The latest ITU meeting ended without a formal Internet Governance treaty (see earlier posts), but it still seems on a rather contentious track.
  -  WCIT and Internet Governance: Harmless Resolution or Trojan Horse?,  CircleID

A Gannett paper in New York made the wrong kind of headlines by publishing gun permit owners names and addresses in an online searchable map, then doubled down after a wave of criticism from citizens and more ethical journalists.
 -  Where The Journal News went wrong in publishing names, addresses of gun owners,  Poynter

Some digging by the Wall Street Journal found that one of the big Times Square digital billboards rents for $3.6 million a year, and the digital billboards for just one building (One Times Square) generates more than $20 million annually.
  -  Times Square Billboard Costs $3.6 Million a Year,  Digital Outsider

Several major cable MSOs are moving broadband data subscribers to usage-based pricing - putting data limits on standard subscription options and charging users for overages.  Expect heavy opposition from consumers (who increasingly have other service options) and streaming services.
  -  2012 Year In Review: Usage-based broadband launched by Comcast, Time Warner Cable, Suddenlink,  FierceCable

One consumer survey found that 70% of gift-givers planned to purchase tablets for Xmas 2012, helping to feed the rapidly expanding mobile, e-content, and apps markets.
  -  Burn the Books: Make Way for E-Content, IGI-Global

The Season's Re-purposing Idea - The Seattle Times, which has a tradition of publishing "Pictures of the Year" in its weekly print magazine (and as a feature in its online photo galleries), is also making it available as an e-book for iPads.

  -  How the Seattle Times made an iPad book from its best photos of the year,  Poynter

I'll try to expand on a few of these and other news and changes that have piled up. 

Skype starts billing other carriers

Remember when Skype was free?  While it's still free for computer-to-computer calls, Skype started instituting fees in 2010 for calls to wired and wireless telephones, group video calling, and other advanced services.  Now a part of Microsoft, Skype is introducing direct operator billing (DOB) as a mechanism for collecting those fees from its users.  Direct Operating Billing refers to systems that simplify the purchase and billing process (charges are billed directly to a user's existing online credit account, rather than requiring the collection of credit card or other payment information for each individual charge).  Microsoft feels that making the billing process easier to navigate will lead to greater use of fee-based services -

“We expect ease of payment to attract new users, while existing users will become more profitable customers as they increase their spend with us,” indicated Neil Ward, GM for business operations in Microsoft’s Skype division.

  I'm not so sure - people chose Skype because of its free services, and the advanced services that Skype charges for are mostly small niche services.  In addition, looking at it from an economic perspective, moving to DOB simplifies billing and somewhat reduces the ancillary cost of using a particular service, suggesting a shift in perceived cost and movement along the existing basic demand curve.  Reducing perceived costs, particularly fairly small indirect costs, may well result in some increase in use - but the overall impact is likely to be minimal. Simplified billing, however, is unlikely to significantly affect the underlying inherent demand for Skype's advanced options (i.e., shifting the whole demand curve). As such, the impact on overall use is likely to be small.

Source  -  Skype intros carrier billing,  telecoms.com

NY Times Gets New CEO - from BBC

Last week, the New York TImes announced that it had finally hired a new CEO to fill the position that had been empty since the previous CEO left last December, after making a series of embarrassing gaffes.  The new CEO will be Mark Thompson, formerly the Director General of the BBC.

  A number of media critics have questioned the hire, noting that -

• Mark Thompson has spent all of his media career at the BBC - a government-funded public service broadcaster.  He seems to have no newspaper experience.
• While he was Director General during the times the BBC made considerable, generally successful, efforts moving into the online/mobile universe - most insiders felt that Thompson was seen as more of a "custodian and curator" than an innovator.
• Is Thompson's salary of $1 million a year reasonable for an organization that is still bleeding revenues profusely? ($140+ million in losses in the last quarter).  But it's actually worse than that - Thompson's deal calls for a reported $8+ million in salary, incentives and prospective bonuses that he could receive by the end of next year.

On the business side, the latest financial reports see that ad revenues continue to decline at the Times, with print-ad revenues down a reported 7% in the last quarter (online ad revenues were also down).  In the last quarter, the Times reported making more revenues from subscriptions than from advertising.

The bottom line is that a business-as-usual or custodial approach is not going to cut it at the NYT, not when revenues are declining as rapidly as they have been. And shedding some staff or tweaking the product with a few digital bells and whistles isn’t likely to accomplish much either. The legendary paper doesn’t need someone to manage its business; it needs someone to reinvent it on a fairly fundamental level. Whether Mark Thompson is the man for that particular job remains to be seen.

Sources - Is Mark Thompson what the NYT really needs right now?,  GigoOm.com Tech News and Analysis. 
NY Times boss Thompson eyes $8m payday,  AFP/France 24

PwC - IPTV Key for Australian Media

Global analyst firm PricewaterhouseCooper (PwC) released its Australian Entertainment & Media Outlook report for 2012-2016.  The report predicted that IPTV and other online television subscription services would lead the way in growing the Australian media & entertainment market 18% over the next five years.  The report suggests that by 2017, more than a quarter of Australians will have switched to IPTV subscription services, concluding that the shift "makes IPTV a strong market contender among the boxes vying to control content shown in Australian living rooms."

  The study forecast an overall annual growth rate of 4.1 percent for Australia's media $ entertainment industries, despite continuing declines in the print sectors.  The report predicts that newspapers will see circulation declines average 7.6 percent annually, and drops in advertising revenues of 5.1 percent per year.
  The report recommended patience as emerging new online business models will take some time to fully develop.  It also had some recommendations for policy, warning that

"some types of Australian content--drama, documentary and children's programming-- would all but disappear if it were not regulated, due to the high costs of production."

Content, in fact, was a critical concern in terms of the future success of media and entertainment industries, firms, and markets. PwC analyst David Wiadrowski warned that content "cannot be taken for granted. Popular professional content that crosses platforms, aggregates viewers, prompts recommendation and lights up social media, becomes increasingly valuable."

Source - IPTV seen as important piece of Australian media and entertainment industry future FierceIPTV

Study claims Live TV piracy growing (wrongly)

A study by Google and PRS for Music is suggesting that live TV streams is currently the fastest-growing aspect of online piracy.  The study identified 153 sites "believed to be significantly infringing copyright" to see the kinds of content and services offered, and the business models used.  Researchers identified six basic types of core activities on the sites - Live TV Gateway, Peer-to-Peer (P2P) Community, Subscription Community, Music Transaction, Rewarded Freemium, and Embedded Streaming.  They then examined a further 104 sites to validate the appropriateness of the six core activities.

  The study found that Live TV Gateways (sites offering links to streams of live free-to-air or pay-TV channels) accounted for roughly a third of the sample, and was the fastest growing areas of core activity.  Advertising support was the primary business model for two thirds of those sites in the sample, although the report claimed that the majority of ads were for companies "outside of the mainstream."  The report suggested that many of these sites also solicited donations from users as part of their business model.
  It should be noted that if these sites only offered links to legally licensed TV streams (say to network, station, or program sites) and not links to unlicensed sites or unlicensed content, that activity does not fit current definitions of online piracy.  As such, statements or inferences that such activity is piracy, or that all TV streaming gateways are illicit or an area of online piracy is not necessarily accurate.
  Peer-to-Peer Communities were identified as the second fastest growing segment, and relied even more heavily on advertising for revenues.  Of the websites in the sample with P2P sharing as their core activity, 86% carried advertising.  In contrast, subscription and download sites used user payment systems as a revenue source.  Some 69% of such sites featured credit card logos, and 39% had separate payment pages. The sites in the sample offered a wide range of of digital content, from films and music to games and ebooks.

Google's Theo Bertram said that "The evidence suggests that one of the most effective ways to do this is to follow the money, targeting the advertisers who choose to make money from these sites and working with payment providers to ensure they know where their services are being used."

PRS for Music chief executive Robert Ashcroft added: "This groundbreaking research tells us two things. Firstly sites involved in copyright infringement are businesses with real costs and revenue sources. They receive subscription or advertising revenue, pay their server or hosting costs but fail to pay the creators of content on which their businesses depend.
"Secondly, not all of these business models are the same, and the government now has the evidence to understand which policy levers to apply to deal with these different businesses effectively."

  You have to be careful with a lot of these "rampant piracy" studies, as they tend to overestimate both the frequency and impact of the alleged piracy.  So I took a look at the actual study and methodology, and will toss in my own warnings about the validity of some of the claims.
  First, I could find no indication that the researchers actually checked to see if the content and services offered by the sites were illicit. They only measured if content of a certain type of content was present on the site or not, and for some content types how many of the top ten examples of that content were available.  There was no measure of whether the content was offered legally, or whether content owners were paid for access to their content by the sites.
  Second, the study did not directly observe business models of site owners, but rather looked for evidence of features assumed to be associated with certain types of business models.  That is, they did not directly measure a site's commercial motives or choice of business models (or the success of any such models).  Rather, the choice and relative importance of a business model to a site is inferred.  The study thus can not validly claim that these are the models, or which are predominant - only that sites seem to be employing some aspects of particular business models.
  Third, all revenues and costs were derived indirectly from specific formulas, and in many cases, from assumed values.  For example, revenues were estimated by multiplying the number of page views times the lowest listed price for that type of content.  The formula assumes all page visits result in sales, and that there is no "free" content available - both highly unlikely assumptions.
  Fourth, this was a self-selected sample of sites identified by UK "experts" and is not generalizable, either as sites "involved in copyright infringement," or more broadly as digital content access sites.  The study methodology explicitly assumes the sites engage in online piracy, but offers no evidence in support for that assumption.  Any "finding" involving piracy is thus not a valid finding of the study, but merely an assumption.  And the purposive sampling method precludes the randomness needed for generalization to wider populations.  Any study findings are valid only as descriptions of that particular sample.

  These issues don't necessarily invalidate the first parts of the study - identifying the types of site content and services offered on the sampled sites, and the range of business models they seem to be employing.  The study can and does validly claim that there seem to be differences in the types of business models  the sampled sites seem to be using, and that the segmenting of content and services for the sampled sites are a reasonable way of distinguishing types of content/services (if not the only possible way).  However, any specific measures and proportions aren't generalizable to the larger population of websites (either legal or pirate), and the actual commercial motives business models are inferred rather than observed. In addition, any revenues or cost estimates derived must be considered to be unreliable and imprecise (at best).  But most important from a validity perspective is the fact that the sites are only suspected of being online content pirates (or even of being commercial).  The study did not directly confirm either presumption.  Specifically, the first key "finding" identified by Roger Ashcroft above is not valid findings of the study, and would have been roundly rejected as valid conclusions by any serious peer review.
  In particular, the definition and description of the "TV Gateway" type sites make it clear that these are quite different from other content-sharing or downloading sites - and in fact, sites that only link to other places where content is legally available aren't necessarily violating copyright or engaged in piracy.  Any attempt to broadly label TV gateway services as pirates is misleading at best, and wrong and libelous at worst.  The number of such sites, and even their use, may be growing, but the study fails to demonstrate that such sites are engaged in online piracy.  Journalists should be very cautious of repeating such claims

Sources - Live-TV fastest-growing area of online piracy, says study,  Digital Spy
The six business models for copyright infringement, PRS for Music/Google report