08 August 2011

Tangible Evidence of "Cord Shaving"

The title of this post is provocative, but it is not as provocative as the content that inspired it.

For many years, cable executives and some industry analysts have downplayed the impact of cord-cutting on the multichannel subscription television business. The arguments have some merits. Multichannel penetration continues to rise each quarter. Broadcast has been free competition for cable television forever. The most popular online video is YouTube, which, while a wonderful service, is not a substitute for a television subscription, except in the sense that people watch television and people watch YouTube. Netflix, even in its DVD-by-mail incarnation, got a lot closer to being a substitute. The programming (movies and TV series) was the sort of thing that people watched on TV. It did offer a large amount of choice -- one of the primary virtues of a multichannel subscription versus broadcast television. It was an all-you-can-eat subscription that offered a lot of value for heavy users (or multiple person households). Netflix was seen as a good service for "cord shavers" who might drop premium channels like HBO and Showtime and get their movie fix from the company with the red envelopes.

For those waiting for the multichannel television business to be roiled the way that the music business was, the first big cracks were admitted last week. The dirty little secret is porn.  Porn on cable was a wonderful business.  The retail prices were high, the marketing costs were low (consumers who want it seek it out) and the wholesale costs were modest (there are lots of companies that make porn and the cable companies easily pit them against each other; also there are few barriers to entry in the porn business and it requires little capital, so new suppliers are always entering the market).

Multichannel distributors never talked much about porn in their earnings calls before.  The subject was considered...in poor taste.

Time Warner Cable and DirecTV were forced to admit that the reason for the declines in their VOD business were large declines in the sale of porn.

It is no wonder that porn is the canary in the coal mine. Anonymity is a plus for consumers (no need to explain the VOD purchase on the cable bill is a plus in many households). Short form content is often a good substitute for long form content in this genre (most long form content could be considered a compilation of scenes -- the unit of payment for the performers). A relatively small amount of the porn market is branded (Playboy, which doesn't consider what it provides as porn, is the strongest brand name in "adult video"). Also, there is a tremendous supply of free content on the Internet.

What is the next genre to be cord shaved? Many categories of news seem to share these characteristics:  weather information, sports highlights, entertainment news are some of the more obvious examples.  These sorts of services (The Weather Channel, ESPNews, E!) do have the advantage of being bundled on the basic tier, rather than being a separate purchase, for consumers. These channels are also bundled with other channels for sale to the distributor. Therefore they are not easy to drop, even if their value to the bundle is declining. But it sure looks like their value to the bundle is, in fact, declining.

No comments:

Post a Comment