The Networks: Walking Dead

walking dead photo2One of the most popular shows on television is AMC’s “Walking Dead,” replete with necrotic flesh, apocalyptic violence and the never-ending struggle just to survive.  Which could be a prescient plot line for the TV networks themselves.  For a decade or more we’ve heard that content is king, but now the King is Dead, or at least a part of him is dying.  Consider the signs in the past few months:

–Yesterday Sony Corp. said it will produce original TV shows to air on the Sony PlayStation, which also is offering a separate pay-TV network.  Microsoft has enlisted Steven Spielberg in developing original shows for the new Xbox One.

–Newsmax, founded as one of the first online news websites back in 1998, aims to launch a new cable news channel later this year, to augment six hours of daily live video programming it runs alongside hundreds of articles online.

–Last month World Wrestling Entertainment launched its own online video network, in competition with the shows it sells to cable networks.

–Two old-guard media execs are starting a new video network offering provocative personalities by-the-channel.  Jess Gaspin, a former chairman of NBC Universal Television, and Jon Klein, who used to run CNN, reportedly are set to start TAPP (“TV App”) within weeks.   (Yo guys, call me?)

–Netflix is embedding itself inside Comcast cable-TV boxes to become a de facto on-demand channel of its own, available online or on television.  Hulu and Amazon are increasing original-production efforts for their online networks.

–Discovery Communications and Time Warner Inc. are contributing to their own eventual (and inevitable) demise.  Discovery is launching an online network that offers live and on-demand shows.  Time Warner’s HBO Go lets tablet-watchers draw from the HBO library of new and old shows, without having to watch HBO on cable at all.

That is a digital blitzkrieg–a BITS-KRIEG!–of new competition in a very short time.  It may be just the beginning.  Twenty-five years after the advent of the World Wide Web, the Internet wave of creative destruction—or indiscriminate and devastating destruction, if you’re on the receiving end—finally is reaching the shores of the television business itself.

In the next decade—or a half-decade, even, or maybe it will take two decades—this wave could wipe out tens of billions of dollars in stock value and create billions more in new value.  Investors are not ready for this, and the companies themselves are even less ready for this.  It could be way early even to bring up this threat.  We always overestimate how fast new technology will wipe out the old, and we underestimate how obstinate and effective the incumbents are in fighting back and staving off extinction.

But at some point, TV networks will fall victim to the same wave of destruction that has roiled newspapers and magazines, and pagers and faxes, and travel-booking and book-buying, and retailing and car-shopping, and job-hunting and house-hunting and myriad other once-contented businesses that were doing just fine, thank you, until they were crushed by the Internet.

It will happen faster this time than it has in the past, thanks to the network-effect (a.k.a. the crowded-restaurant theory:  Everybody goes there… because everybody goes there).

And when this destroyer wave does happen, the fundamental value proposition that had long been unassailable suddenly will be at risk for CBS… and Viacom… and Time Warner Inc. … and Discovery… and Disney (though it has theme parks and movies to offset a TV channel setback).  Comcast’s magical acquisition of NBC Universal from General Electric—$13.7B for the first half in ’09, $16.7B for the second half in 2013—might look overpriced and short-sighted.

So might today’s deal for Media General to buy Lin Broadcasting’s 43 network-affiliated local TV stations for $1.6 billion (plus $1B in assumed Lin debt).  The combo will be the nation’s No. 2 owner of TV stations at 74 outlets, potentially pricey relics in an era of tablet-TV-anywhere.  See story here:

Cable-wire companies, by contrast, could be less buffeted (Comcast’s cable biz, plus Time Warner Cable, Cablevision, Cox, and the fiber-net businesses of Verizon and AT&T).  That’s because, even if cable channels disappear, local cable systems dominate the Internet-access business and still reap subscriber revenue after viewers defect to the Net.

The real upside, though, may go to the small outfits that create new kinds of content for the Net.  They will grow into the media & entertainment titans of tomorrow… or they will get bought at fabulous premiums by the incumbents that are scrambling to cauterize the aforesaid risk to their real value.

One small glimpse: In my six weeks of job-hunting, two different guys have approached me about joining new video-nets they are raising money to launch online.  They have no track record in media and they lack huge hordes of capital, and nowadays on the Net that doesn’t have to matter.

For decades, the biggest cable channels and broadcast outlets have held uncontested control over the fount of entertainment and news content delivered to the omnipresent platform of our lives: the TV set.  For the first four decades of mainstream TV (the 1950s, ’60s, ’70s and much of the ’80s), the Big Three broadcasters controlled virtually all of the audience.  By the 1990s a few dozen interlopers had arrived—the major cable channels.  Then came dozens of new niche channels.

An odd thing happened to the incumbents:  Instead of losing value, they gained value.  As their combined audience went down, their ad rates to reach a thousand viewers just kept going up and up.  Why? As the cable dial jammed up with dozens and dozens of outlets, the likes of ABC, CBS, NBC and Fox and cable’s ESPN and USA Network stood out more not less.  In a fragmented media-verse, they were the only sure bets for advertisers to reach mass audiences easily.

But now it isn’t far-fetched to think that thousands of channels one day will be competing for viewer bandwidth.  Maybe even millions.  Someday every person online may easily be able to offer their own video network to the world.  So many people will be broadcasting that it could reduce the ranks of the audience they had hoped to reach: everybody else.

All of this could unfold even as the one big platform at home, the HDTV, is splintering into dozens of mini-platforms viewable anywhere.  Now video plays on tablets and smartphones of any stripe, on AppleTV and the Roku box and the PlayStation and Xbox and beyond.

If I had to place a single, sure bet in all the TV turmoil yet to come, I’d put it on Google, the ultimate surfer of Internet destruction.  Back in 2007, when Google was at $500, I had predicted it could clear the $1,000 mark in five years.  It took six, and today GOOG is at $1,200.

The Google guys had their eye on this on-demand, million-channel multi-verse when they struck the deal to buy YouTube for $1.65 billion in October 2006.  The price is downright quaint by today’s standards.  Facebook just paid ten times that sum for the simple teen-text app WhatsApp.  YouTube now gets one billion visitors every month.  Its ad revenue reportedly surpasses $5 billion a year.

A few months after the YouTube deal, in January 2007, in Davos, Switzerland during  the World Economic Forum,  I asked a Google guy about the YouTube deal.  It was late one night at the famed Piano Bar, where many are overserved.  YouTube one day could be a gateway to ubiquitous TV-on-demand, I pointed out—but why would Google get into the television-carriage business when it offers far lower profit margins than the fat margins of Google’s online ad business?

The Google guy extolled the virtues of Internet Protocol and its unrelenting pressure on costs.  “It’s IP,” he said simply.  “We can do it cheaper.”

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