When will channel debundling happen?

Answer: When Disney has accumulated enough direct subscriber relationships to cut out the CableCos and go direct to consumer.

Nielsen Channel Availability

Ever wondered why the cheapest cable package with ESPN starts at $80/mo and includes 100+ channels, most of which you don’t watch? (Note: This Nielsen study suggested the average household watches just 16 or 13% of the total average 130 channels available)

It’s because of competitive feature bloat, contractual obligations, and the inconvenient fact that if most users were given the choice of what they’d pay for, they’d drop 7/8 channels immediately.  The key to this puzzle is that the channels themselves are often owned by large conglomerates.  So to offer ESPN, you not only have to pay $5 per month for ESPN, but another $5 per month for ESPN2, ESPN3, ESPN Classic, ESPN U, ESPNews, oh, and by the way, all of the Disney channels too, since Disney owns ESPN.  Add it up and that’s about $15 right there, just to offer any single one of those channels.  Then consider there are another 100 channels that the average user has access to and you can see why it all adds up to a hefty bill.  Typically CableCos* end up paying $50-60 per user per month just in content costs to be able to offer the channels.


Example Viacom channels


So what’s been happening? A few things:

  1. Consumers beginning to get used to consuming content OTT (OTT= Over the Top) and pay for it with services like Netflix/Hulu/Online streaming (still <5% of the US that have cancelled their subscriptions instead of supplementing)
  2. CableCos trying to satisfy trends in multi-device viewing and increasing devices/user by TV Everywhere initiatives. They are not tech companies (in the modern sense) but now find themselves in the business of online streaming content (or having someone do it for them)
  3. High demand and premium channels have begun to allow CableCo subscribers to create an account and get free digital access to their content on whatever device they wish


What’s interesting is that the “help” the content owners like Disney are providing to the CableCos by creating their own streaming services that CableCo subs can plug into and access, is the same tool that will bring about the CableCos’ eventual downfall (at least from the TV business).

See by “helping” the CableCos to offer content as “TV Everywhere”, big content conglomerates like Disney and Viacom (owns Nickelodeon) are slowly but surely obtaining direct digital relationships with the end user, the cable TV sub.  Previously, the CableCos were the distribution channel for the content owners to reach end users, and that model stood for 50 years. But the internet is the new distribution channel, and as soon as the content owners can ensure they can reach the same number of subscribers directly, they would be irrational not to cut out the middleman.**  When this happens, all hell will break loose for the CableCos, since their TV model is based on bundling together a bunch of stuff that no one wants with some stuff that everybody wants.  When the stuff that everybody wants comes out, all of a sudden you’re going to need to:

A) create something new that everyone wants and craft your bundles around it

This could theoretically happen, though a more viable alternative would be to acquire several key networks to prevent this.  Still, for many consumers, ESPN, Disney, Nickelodeon, Nature/History, and a handful of other channels are real anchor channels, which are already owned by large conglomerates.

B) begin debundling by offering a la carte or “build your own bundle” options

To be fair, some CableCos have already experimented with this, but there is a reason why none are eager to push this strategy on more than 5-10% of their subscribers. When people can pay for what they want, they purchase way fewer channels.  That means less revenue for CableCos and is when the bubble they’ve been able to create by forcing people into bundles that they wouldn’t normally pay for… POPS.

Goodbye 25% of a $100B/year industry.  The end result will be a bit better for the content owners (since they don’t have to pay that pesky toll-booth fee to the CableCos), a lot better for consumers (since they are paying for what they want), and a lot worse for the CableCos.

I can’t really blame the CableCos for fighting this change, but I do think their actions will make the inevitable sting all the more when they abet the growth of content owners’ digital channels via their trendy TV Everywhere initiatives, and exacerbate the pricing bubble by continuing to force people to stomach these unnecessarily large bundles without alternatives.

PS, the “Premium” channels like HBO and Showtime are all going this way too.  What will be really interesting is to see whether the content owners attempt to begin pulling a similar play in other countries.  Since they mostly have nothing to lose (little to no subscriber base), my gut is that, YES, this is definitely in their longer term strategy.

*CableCos for the purposes of this article also include some of the traditional telco providers that have also ventured into video meaningfully like AT&T with U-Verse and Verizon with FiOS

** This of course assumes that current trends will continue and that a comparable number of people will be reachable e.g., with internet-enabled TVs, which looks to be the case based on current data and projections.

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