Screw Cable, I Just Want ESPN and Mad Men

Many technologists and general consumers wonder why an “a la carte” pricing model doesn’t exist yet for television channels. The benefits seem to include the mobility of extended choice for consumers, increased revenues for proven channels, and an overall more efficient business model for networks and television studios.

Sadly, the main sticking point is that a more efficient business model is not something the media conglomerates are looking for, since any efficiency shift in the programming business would directly take money out of their coffers and into the hands of either a) the consumers or more likely b) the MVPDs (multichannel video programming distributors such as Comcast, DirecTV, Dish, Time Warner Cable, etc.) who would absorb the value of lost, under-performing channels that people generally would not watch were it not included in the bundle.

Furthermore, while there’s little doubt that people would indeed like the option to pick and choose which channels they receive, there’s no reason to suggest that consumers would actually prefer to purchase their channels directly from ESPN or AMC or Comedy Central. While those specific channels (and a few others) have tremendous brand equity with consumers, I believe most people would still prefer to go through an MVPD to get their programming and vice versa. Case in point: You would never go buy bananas directly from Dole, you would go to your local supermarket. Even if the only thing you’re looking for that day is bananas, supermarkets (and MVPDs) create value by providing the necessary distribution network for goods/services.

In addition, cable channels obviously want to go through MPVDs for distribution because of the added value of bundling. Case study 2: HBO Go and ESPN3 could both operate as standalone businesses that charge users a subscription fee for access to content. However, it is very deliberate choice that they do not, so as not to upset the current bundling model that makes the TV world go round. Both companies decided to create these killer must-have apps for free to drive more subscribers to cable operators and subsequently their channels (where the real money lies).

You might say that buying bananas is one thing, and paying for programming (which is made up of bits and bytes of data) is another. One requires physical real estate of housing and inventory, while the other simply exists in the ether and can be distributed wirelessly. To counter, let’s take a look at the music industry (the once-and-future punching bag for all cautionary tales in the media business).

The erosion of the music-buying business was not cemented until Apple’s iTunes came along. It’s worth repeating again, iTunes destroyed the music-buying business. Sure Napster, Kazaa, Grokster and a variety of other music sharing web apps precipitated the downfall and piracy made it viral. But when Steve Jobs decided to favor the 99-cent single business over the $10+ album business, the nail was in the coffin. The long tail of music was created and all the 99-cent singles at the head of the curve could never make up for the lost value in the album tail-ends.

For that reason, I don’t see the bundling business going away anytime soon in cable. The stakes are too large, the media conglomerates involved are too powerful, even for Google. It would truly require a disruptive service as paradigm-shifting as iTunes by a company as large as Apple or Google in order for a la carte pricing to even sniff daylight. And the MVPDs have the benefit of business hindsight to prevent another iTunes-debacle from occurring (see TV Everywhere).

Then again, if the BCS can adopt a playoff system, then anything in this world is possible.

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CBS is the Honey Badger and It DGAF

CBS is the honey badger; they truly do not care. All they do is make money. There’s no flash or pizzazz; they just consistently crush it in boring and bland businesses like TV ratings, retransmission fees, outdoor advertising, and radio. And I continue to remain super bullish on CBS since I bought in last year  (up 35% since June 2011).

Again, this is me repeating myself, but I believe in CBS because I believe in their CEO, Les Moonves. He’s such a boss. From a recent Variety article:

When Steve Jobs asked Leslie Moonves for programming to launch Apple TV, the CBS chief said thanks but no thanks. It’s his standard response, he said Thursday, when startups want content and say, “As we grow, you will grow.”

“I don’t do that. I say, ‘Give me half a billion dollars for my content.’ We own the content. They need our content and they know it. It’s what I said to Steve Jobs,” he told investors at the Goldman Sachs Communacopia media conference in Gotham.

Les Moonves basically told Steve Jobs thank you, but suck it. He did the modern day equivalent of Gandalf vs the Balrog:

Steve Jobs/Apple/any tech company that needs quality content: Give us your content for free, or else…

Moonves: YOU SHALL NOT PASS.

That’s true boss behavior. Furthermore, going back to the CBS is the honey badger analogy, Moonves (apparently channeling kindred spirits DJ Khaled and T-Pain) also said “”We are the least sexy network. We get less buzz and less Internet activity. All we do is get more viewers and more money.”

“The world is a beautiful place, we’re going to get paid more and more and more,” Moonves said.

Ironically, CBS does not typically sell to the other company I’m bullish on, Netflix. The two entertainment companies (broadly speaking) operate in different business segments (serialized TV vs. series TV, mass appeal entertainment vs long tail entertainment), which doesn’t make them any less effective. In fact, I would go so far as to say that if you hold shares in both companies, you have the entire media/entertainment spectrum covered. The only other company I would even considering owning would be Disney, on the strength of ESPN and their IP-driven, content-based business model.

Lastly, from Friday, September 21, 2012: CBS Stock Hits New 52-Week High (CBS)

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Why I’m Bullish on Netflix

Over the past year or so, Netflix has received a serious bashing from Wall Street as the company continues to re-invent its business and flesh out internationally. From a high of around $300 back in the summer of 2011, the stock has fallen more than 75% to around $58 today. This past Monday, the stock fell a whopping 6% based on more concerns about the video subscription service’s ability to make money and retain customers as it grapples with higher licensing costs and tougher competition (Grim analyst report delivers latest hit to Netflix, Yahoo! Finance).

While the stock may have been indeed over-valued at its peak, here are some of the reasons why I still believe in the company, both as an investor and a consumer (note: I currently do not own any shares of Netflix).

1) Strong CEO – Reed Hastings is a boss. Intelligent, intuitive leader with strong views on management and organizational growth in addition to innovation. Two moves particularly stand out to me that prove he’s a great CEO. #1: He was willing to cannibalize his own industry-leading, high-margin, business of traditional DVD mailings in order to capitalize on and stay in the forefront of the digital distribution revolution. Many a strong company have sunk into complacency when they carve out an industry leading position in a particular business only to fall victim to the changing times (see: Sears, Blockbuster, Blackberry, potentially Microsoft) with their inability to innovate. Hastings saw that streaming was the future of the content delivery business and took huge hits in the media and in the company’s stock price to adjust ship and focus his R+D to online delivery services. This fearlessness cannot be quantified or reflected in annual reports but it is the reason why companies are successful for as long as they are. #2: Reed is not afraid to take chances on his business and own up to his mistakes when those chances fail. When Netflix split their DVD business from their streaming business into two companies (and subsequently, charged for both services), the public backlash was tremendous. Everyone makes mistakes and even really smart people make really stupid mistakes, CEO or not. I think a true testament to leadership is not the ability to avoid mistakes but rather the ability to take risks and then to recognize and rectify mistakes when they happen. Qwikster is now dead and may it never rise from the dead like Resident Evil, but Reed Knows He Messed Up. And he wasn’t so arrogant or out-of-touch to not change things.

Side tangent: Other strong media CEOs that I like include Les Moonves (CBS), David Zaslav (Discovery Communications), Jeffrey Katzenberg (Dreamworks Animation), Jeff Bewkes (Time Warner), Bob Iger (Disney), Jeff Bezos (Amazon) and Brian Roberts (Comcast).

2) Strong company culture. Much has been written about Netflix’s company culture (which again, is derivative from the strength of top-down organizational management that starts with the CEO) so I won’t bother to reiterate it here (but you can read about it here, here or here). All I know is that the most effective armies are staffed with the strongest soldiers who will defend their country (or company) to the death. Obviously an overstatement to compare Netflix to a military unit, but the comparisons are certainly there.

3) Value added service. Netflix serves as both a traditional media enhancer AND disruptor. Many new tech companies are one or the other, few are both. And that is a very good place to be in.

4) The “verb” test. Once a company name becomes a verb in everyday use, it’s going to be around for a while. See: Google, Facebook, Twitter (tweet), Yelp (to be determined, but I have strong faith in this company).

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