If you’re a large tech company looking for your next phase of growth a $500 billion market being massively disrupted by the Internet would be pretty interesting right? Turns out you’re in luck. Say hello to the television market.
See if this sounds familiar. A large content market goes digital. Slow-moving incumbent players try to hold the dike through a combination of blocking maneuvers and token, ill-fated, self-cannibalization initiatives. Internet-savvy interlopers swoop in to kill the poor incumbent ostriches. Content providers are sitting pretty but everybody between them and the end user is at risk. Change is geometric, slow at first but quickly accelerates. Yep, sounds just like the battles in the classifieds, newspapers, music, books, magazines, etc. But this time things might be different and more interesting for a few reasons.
First, the TV market is currently the mother of all content markets so no one is going to give up $500 billion easily. Next, big Internet challengers have already tried and failed (but are now gearing up for the next pass). Third, the incumbents have seen this play before and have prepared better defenses. Lastly, taking the distribution channel isn’t going to be as easy as other content markets. The incumbents own the pipes and are going to leverage the heck out of that stranglehold. It’s going to be fun to watch. Here’s what’s at stake. (If you want a 10,000-foot view of the battlefield click here.)
Ads + Subscriptions + Hardware
For the TV battle, it’s not just ad and subscription revenue at stake. Apple has proven that hardware revenues are at risk too. Add these three up and you get about $500 billion globally. About $190 billion in television advertising. About $200 billion in pay TV subscriptions including cable and satellite. And about $75 billion in television hardware revenue. There’s probably overlap and some additional ancillary markets I’m missing. I’m not counting set top box revenue because that’s largely subsidized as part of the pay TV fees. Internet access probably shouldn’t be included either since the cable, satellite, and telco companies have got that locked up.
While Internet ads are catching up, television ads are still the largest ad market. $190 billion for television versus $72 billion for Internet advertising. And according to Deloitte & Touche, television has been growing and will continue to grow as a percent of total ad dollars.
The vast majority still goes to broadcast providers. Using MagnaGlobal’s data, the almost $200 billion TV ad market breaks down as $126 billion going to broadcast providers and $44 billion going to pay TV providers.
For the $200 billion pay-TV part of the equation, revenue is primarily split between cable and satellite providers with IPTV coming on strong but still at a tiny 4% percent. Satellite surprisingly has been gaining and is projected to overtake cable this year. According to Digital TV Research, 2010 pay TV broke out to cable $76 billion, IPTV $6 billion, $73 billion.
Over-the-top (OTT) revenues, like Netflix, Hulu, and YouTube, are projected at $14.7 billion by 2016 will come out of the existing $500 billion spend. Video-on-demand is a $16.4 billion business.
Key Participants Downstream
Even though they don’t bill customers directly, some of the downstream players here are important. Most important are the content guys. They can play king makers by withholding their content. As the Stars/Netflix conflict shows, the content guys are going to aggressively protect their lunch. Overall content producers will do well. They are racking up record affiliate fees and the TV ad market seems to be weathering the recession okay.
The other downstream players that are interesting are the set top box manufacturers. They’re important because they are the key cable and telco gatekeeping. As long as cable companies are subsidizing set top boxes this is a tough mote. But the penetration of Internet connected TVs represent a way around. Internet TVs are up to 30% of households and growing fast. Also Google’s link up with Motorola, a key set top box manufacturer, should prove interesting.
How often does a $500 billion market get turned upside down? Not often. It is going to be fun to watch the challengers and incumbents duke it out. Click here to see an overview of the battlefield.
