How the TV Business Got Rich Off the Thing That Was Going to the Kill It: The Internet

The Atlantic

In TV Land, the dinosaurs still rule the world

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Surely, you've heard the news: The cable business is broken, the end of TV is nigh, and it's only a matter of time before the Internet does to television what it's done to music and newspapers -- which is to obliterate the old business models and leave something shiny and new in their place.

Maye. Somebody. For now, the dinosaurs of media still rule the world.

As David Carr explained today in the New York Times, the two industries that make up what most people think of as the TV business -- content companies (who own the shows and the channels) and cable companies (who own the infrastructure that transports the shows and channels to your TV box) -- had a smashing year in 2012. Many of them outperformed the newer and nimbler companies (Apple, Netflix, Google) that are supposedly destined to displace them. They owe much of their success to the very thing that was (is) supposed to kill them -- the Internet.

First, the numbers. The TV business had a spectacular year. Cable's heavy hitters crushed the S&P 500 average in 2012: Comcast led the pack, up 57 percent, followed Time Warner Cable (up 53 percent), and Charter (up 34 percent). Among the big media companies, News Corp, CBS, and Disney, and Time Warner all finished up over 30 percent. (Those four conglomerates account for just about all of the television I watch, since they respectively own Fox, CBS, Showtime, ABC, ESPN, and TNT.)

What is making these "dinosaurs dance?", as Carr colorfully puts it. The Internet was supposed to make these companies poor. Instead, the Internet is making them rich.

"We heard stories about how cable was doomed by the Internet as early as 2003," says Craig Moffett, an analyst with Sanford C. Bernstein. "It has finally dawned on investors that, not only was that never a realistic concern, but in fact, the Internet has turned out to be a boon for both distributors and content companies."

To understand why the Internet hasn't destroyed cable, ask yourself: Where do you get your Internet? It's probably from the same people selling you television. Since 2005, total cable industry revenue is up 50% -- and two-thirds of that increase came from selling something that wasn't television. For the most part, it was Internet. Cable companies like Comcast and Time Warner Cable sell broadband at ridiculously high margins. When you compare the total cost and profit of selling TV versus selling Internet, it's clear to Moffett that pay TV "has represented less than half of [cable's] business for more than a year."

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While cable has made Internet a second business, content companies have treated the Internet as a second window. Even as they demand more money from cable operators for the right to carry their channels to households, media companies have also made a killing selling their shows to companies like Amazon, Netflix, Hulu, and Apple. One paradox of online entertainment is that more Reach isn't necessarily more Revenue. Today we have access to more music and news that ever, but since we're only paying for access, the difference between listening to 10 songs and 10,000 songs (or reading 10 articles versus 10,000 articles) is often zero. But the TV industry is getting more reach and more revenue, together.

This would be a good time for me to say that just because traditional media has fended off disruptive innovation in January 2013 doesn't mean there won't be a different story to write in January 2014. Programming costs, especially for live sports, are just insane. Attention is slowly but surely flitting away from prime-time TV and some large cable networks. Cable's high-margin Internet business could get it in trouble with regulators if somebody makes the case that private companies shouldn't have that much pricing power over a basic utility like broadband.

There are many ways that government, audiences, and technology cut down the mega-goliath that is the modern TV business. But for now, Les Moonves, CEO of CBS and a mega-goliath in his own right, is correct: Everything that was supposed to be bad for the TV business has turned out to be good for the TV business.

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