For the last several days, I've been trying to write a post about Aereo, the somewhat controversial service that offers consumers a limited, low-cost alternative to cable TV. Aereo captures and re-sells broadcast signals in a way that the courts have (so far) ruled to be legal, rejecting challenges from the major television networks.
To thwart Aereo's ability to capture and sell their signals, various broadcast networks have evaluated giving up their licenses and becoming cable networks. After a recent court ruling, Fox publicly said it would do so if the courts upheld the ruling.
Ad-supported television networks are already common on cable. ESPN, Bravo, Lifetime, Comedy Central and others are examples. Many are owned by the same companies that also hold broadcast licenses. As examples: NBC Universal owns Bravo, while ESPN and Lifetime are jointly held by the Walt Disney Company and Hearst (though with different ownership interests in each). Viacom, once the parent of CBS, owns Comedy Central.
How does Aereo, with operations pretty much in New York City right now, threaten a $60 billion broadcast television model? By offering choice.
Both broadcast and cable providers could offer a variation on the choice Aereo gives consumers. They could create packages that unbundle certain content, sell them across various pricing tiers and truly test demand for the obscure channels that live in the netherworlds of your basic cable package (Veria Living, anyone?)
Here’s why this story is so hard to write: it’s always the same. Media incumbents use their positions to raise prices and limit choice. Start-ups employ new approaches, often enabled by an innovative technology, to disrupt the market and serve limited constituencies with more cost-effective options. Incumbents cry foul, litigate and disparage.
This fight is not about preserving the broadcast model. Of the 115 million households in the United States, something like 11 million – less than 10% – get their television using broadcast alone. Everyone else either uses some form of cable or satellite television, or they have “cut the cord” (a market thought to be approaching 5 million households).
The fight is not even a full-throated defense of retransmission fees, the money cable systems give broadcast networks to offer their programming. True, it’s a $3 billion market, but that’s just 5% of the total revenue broadcasters receive each year, largely from advertisers.
At its heart, the incumbents are fighting to limit choice and preserve revenues. “Of course they are,” you might say. “It’s only natural.”
To which I say, natural, and myopic.
Not even four years ago, book publishers defended windowing – restricting the availability of eBooks until their proper “time” – as a critical part of the hardcover business model. When that false scarcity didn’t hold up, the larger publishers turned to agency to preserve sales of hardcovers by raising the price of eBooks (which are a license, not a sale) to something north of $12 on new releases.
I know the popular story is different: agency was a last, best defense against the growing power of Amazon; that it preserved or extended choice; and that it bought time for physical bookstores. To the extent that those benefits accrued, they were fortunate but not primary.
So how did agency play out for pricing? A look at the data available from Bookstats tells a story.
In 2011, the first full year after publishers implemented agency pricing, hardcover revenues increased 1.6%, to $7.35 billion. Good news? Not so fast.
Unit sales for hardcover books fell 7.9%, a drop of more than 50 million copies. Yes, we preserved the unit price for hardcover books: it was up 10.4% in 2011. But we didn’t convert lost print sales into digital books. In all likelihood, we lost the sales.
In 2011, the publisher revenue for an average eBook dropped nearly 34%, to $5.47. Some of that is the mix, with strong growth in the sales of trade eBooks overwhelming digital sales in other markets.
But efforts to sell higher-priced digital versions of front-list titles saw only limited success. To the extent that people bought more digital books, they purchased lower-price titles. Unit sales of eBooks tripled in 2011, but the growth didn't come from selling bucketloads of titles priced at $12.
Defending business models can blind us to opportunities that would grow the market overall. Unit sales for digital formats tripled in one year. There’s potential in that, much as there is in listening to the story that Aereo wants to tell.