Here's Why Media Companies Can't Be Like Netflix

Probably the most interesting point to come out of the various calls this week was a confirmation that the cable companies are lowering their ad load.
By Eric Jackson ,

The story was originally published Monday in Eric Jackson's Tech & Media newsletter.


In the second week of Big Media earnings there weren't really any big surprises. It was more of a "steady as she goes" tone, which was a relief to Wall Street.

Probably the most interesting point to come out of the various conference calls was a confirmation that the cable companies are lowering their ad load.

For years now eroding ratings have been compensated for by cable companies by increasing the number of ads they run during the typical hour of television.

This "ad load" metric gets talked about a lot in the New Media world, too -- especially at Twitter (TWTR) - Get Report recently, where user growth has stalled leading many to wonder if its revenue will be able to continue to grow.

"Not to worry," says Twitter management, "we still have lots of ability to greatly increase our ad load."

Just why are the cable companies lowering ad load when you would think there's never been more pressure on them to financially perform for their shareholders? They won't say, of course, (except with the requisite hand-waving to "improving user experience") but it must be a realization by them that this "short-term fix" (i.e., juicing more ad revenue for the same hour of content) is creating a "long-term problem" (forcing viewers to other non-ad supported offerings such as Netflix (NFLX) - Get Report ), which is so bad they think it's better for them to give up some short-term money.

For any public company, giving up short-term money is very difficult. Usually the only ones that can do it have revenue growth up the wazoo to compensate for it (such as Amazon (AMZN) - Get Report or Netflix). In mature public companies, passing a dollar that's lying on the street as you walk by? It's just not done.

My read is that this signals these broadcasters and cable networks are really worried by the secular shift to subscription video on demand (SVOD) companies like Netflix that's happening.

Given this trade-off between short- and long-term revenue, I wanted to point out this answer from Charlie Ergen during Dish Network's (DISH) - Get Reportrecent conference call on how he'd advise Jeff Bewkes or Bob Iger to approach selling off content to SVODs. Here's his answer:

I would say that the biggest thing I think that the content providers should be looking at is long-term. So it's easy to get to the end of the year, end of the quarter, and sell some content out of the back door and don't think it's going to hurt your core business in the short run, and you've got kind a one quarter gain or you make your bonus - you guys all make your bonus. There's always in a company a risk of short-term decisions.

The way I look at it more fundamentally is where can the content is always going to be a valuable commodity, and where can you take content to maximize your long-term value? ...We preach this a lot, and some people agree with us and some people don't. But we think that you can look at what Netflix has done. It was wildly successful, they took a lot of risk, they had a moral compass of where they were going, and they've been rewarded for it. But they made sure their content was available on every device, and they made sure their content, you could binge-view it, and they made their content advertising free. And they've been fairly consistent in their pricing. So that's why people have gravitated to it.

And I think they're now becoming competitors to the incumbent. And so if I was an incumbent, I'd just look at what can I learn from that, and which companies are moving in that direction and how can I partner with them to get my content out in a way that people will consume it and pay me for it? And a lot of what we do at - obviously we did that with satellite TV and a lot of what Roger and his Sling TV team is doing is being an alternative for them to do that.

And so I just think long term, because it's really easy to make -- fairly easy to sell $100 million of programming content to somebody, but you've got to look at it in the big picture and look at it in the total universe...I'd say this, that every major content company is probably going to make different decisions, and some are going to make great decisions that turn out for them long term, and some are going to make some poor decisions. And in a vacuum, decisions are made based on their alternatives. What we can do as a company is be an alternative for them. We have a vested interest in linear TV. We have a vested interest in advertising being part of the economic model, because we know it will reduce content cost for the customers, and we have a vested interest in people getting TV everywhere. And I think Roger's team and DISH in general have shown great leadership on that.

Which are the content companies making great decisions that turn out for them in the long term? And who are making the poor decisions?

It's going to take more than just reducing ad loads to get the kids excited again about linear TV.

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