The TV Content Ecosystem

Last week I shared the talk I gave at MAX which described the the new ecosystem of connected TVs for the Flash developer.

I wanted to take a look at one slide specifically and expand on what the talk track from the presentation. Generally speaking if you look at most content driven ecosystems, there are three components that make up the majority of the revenue. The content, distribution of the content, and advertising on the content. This applies in the TV ecosystem just as much as anywhere else.

This diagram helps articulate the various ways that money flows through the ecosystem. It’s not perfect but it’s a 50,000 foot view on how the money flows with a focus on the fact that you, the consumer, are basically paying for everything. The arrows point out which way the money is flowing. I’ll focus in more detail on the top half, which is for broadcast TV entertainment. The bottom half/third is about movie entertainment.

Value Chain for the TV Ecosystem
Value Chain for the TV Ecosystem

Distribution & Content

In the United  States, the majority of television is watched through some Pay TV operator, whether it’s a cable company like Comcast or a satellite company like Dish. This is the distribution side of the equation. Distribution accounts for roughly $75 billion dollars of revenue in the value chain and is mostly from consumer spending. This is basically the second row of the chart.

Most of the money consumers pay goes to the cable operator and then from them to the content creator to pay for the content. Cable companies pay a different amount for each channel they carry. For example, ESPN is the most expensive channel, costing roughly $4.40 per household passed (e.g. if Comcast is available in 10 million homes, Comcast pays ESPN $14.4m per month).

Online distribution is basically the same (which is the middle row), with the OTT aggregators like Netflix paying for each stream delivered rather than each household passed. There’s a lot of change happening in the online delivery world, and 2011 will likely be quite a bit different than 2010 was. Two specific things will happen in this space. First, Netflix’s deals are about to expire which means the cost they pay for content is going to change (and likely the cost you pay for Netflix). One of the key contracts in Netflix’s arsenal is its deal with Starz for $30 million. It’s likely to cost over $200m to get that content this time around. Second, much online content will come behind a pay wall / TV-Everywhere. This means that when you want to watch a video online (say on Hulu or NBC.com) you may have to sign in to your Comcast account.

Advertising

The other major side of the equation is advertising — which in the United States is roughly $83 billion. At the core, the pricing for advertising is based on the size of the audience you can deliver as well as who that audience is.  Top shows like Lost or Modern Family get paid for by the advertising the network (ABC) sells for each of the shows. Companies like Nielsen are in the business of measuring the audience, and based on the ratings (e.g. points) the networks price out the advertising for the show.

In a 30 minute slot, there are 22 minutes of programming and 8 minutes of ads, so 16 ads. Typically they’re organized in to what are called ad pods, and each pod contents multiple ads. For each available spot some number of the spots will go to the network’s own cross promotion (i.e. while watching Modern Family you see an ABC ad promoting the new fall lineup), local ads (likely served by the distributor), and proper ads. The ownership of the ads in the pods is often part of the distribution agreement between the TV network and the distributor.

The DVR radically changed the way that measurements of audiences has done. New metrics like C3 added in broadcast plus three days of DVR recordings to the mix to capture people time-shifting. That same kind of “+3 days” is now occurring in the online world, too. With TV Everywhere, broadcasters and measurement companies will start to blend the online and broadcast world when it comes to ratings. Since online and broadcast audiences will be measured the same, you’ll start to see the same kind of advertising happening within the C3 window and at rates blend (or are the same) between two delivery methods.

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