The Rule of Thumb on Disrupting Digital Businesses aka Why The internet is not disrupting TV

There is a widespread misconception that the common thread to industries that the Internet has disrupted is that the disrupted industries were or remain analog and the digital nature of the internet made it impossible for them to keep up.  Put another way, there are those that believe that any business that is doing business like they always have will inevitably be disrupted by the internet. Change or die. Right ?

Wrong

If my memory serves me right, the common thread among those industries that were disrupted is that they all sold their products ala carte.

Music – By the CD

Newspapers – Single Newspaper (Dallas Morning News) sold by copy or subscription

Magazine – Single Magazine (Newsweek) sold by copy or subscription

DVDs – Single copy.

Blockbuster – Rent each DVD

In each of the above examples, the primary revenue stream from the product came from ala carte sales – the purchase of a single product.

Compare that to TV.

TV is sold by aggregators who sell TV in bundles. Not ala carte.

Pick any TV distributor. They aggregate the channels they want to sell into bundles and sell them. From basic service to full service with every channel available. If you want to buy PPV or VOD content, you must first be a subscriber.

Look at Netflix. They sell NOTHING ala carte (like I said, smart as shit). You have to subscribe to their service, then you can select the content you want to watch.

Look at Spotify. Pay by the month or don’t play.

You can even point to Apple and the Itunes store.  They aggregate all the content they can find and they bundle Itunes  with their Phones/IPods/IPads/Macs and force you to buy through this bundle.

Look at the most successful business models on the net. All aggregators of content of one type or another.

Now take a look at all the folks who want to be able to just want to watch what they want, when they want to watch it , where and on the device they want to watch it. They want TV Networks to go ala carte.

Look at the companies who want to try to disrupt TV. What are they all trying to convince the TV networks and content providers to do ? They are trying to convince them to go ala carte. They are trying to convince them to go to a business model that assures their destruction.

Explain to me why they would want to do that ?

My Rule Of Thumb for  disruption in the digital world:

Aggregators disrupt ala carte . Aggregators don’t disrupt  Aggregators, they compete with them.

27 thoughts on “The Rule of Thumb on Disrupting Digital Businesses aka Why The internet is not disrupting TV

  1. Pingback: Disruption, Aggregation, and Third Parties « The Scholarly Kitchen

  2. I quit buying CDs because of Napster and then ipod/iTunes. I cancelled by $50/month cable for $10/month netflix. Also as fyi “rule of thumb” comes from that a man was permitted to beat his wife with a switch no thicker than his thumb was a fact, though it was probably not a formal law anywhere nor stated in …”

    Comment by toddq1381 -

  3. It is not normal.

    Comment by Business Directory & Services -

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  5. Good point about aggregators.

    I would say that aggregators solve the distribution problem of matching customers with the right solution. Take a look at the top 10 in the fortune 500 and you will see that each company makes the bulk of it’s profits inn aggregation.

    1. Walmart – Consumer Goods
    2. Exxon – Oil
    3. Chevron – Oil
    4. General Electric – Technology???
    5. BofA – Capital
    6. ConoccoPhillips – ???
    7. AT&T – Comunnication Networks
    8. Ford Motor – ???
    9. JP Morgan – Capital
    10. HP – IT Solutions

    Comment by dchu220 -

  6. Kids will always follow the entertainment paths which they have learnt with her parents. So I find new matra: “The media Enterprise trust to nobody no under 30” not properly.

    Comment by welldent05 -

  7. This is right, unfortunately, many industries are not controlled any more by the customers like it should be, but from the societies, about the Know how and the technology. And all that is dominated by the shareholder Value.

    Comment by wein05 -

  8. Just because customers want something doesn’t mean it will happen. A lot of industries (telecom, finance) are controlled not by customer but by the companies that own the infrastructure.

    The big difference between cable companies versus music and movie business? Cable owns the backbone for delivery.

    Comment by dchu220 -

  9. “Now take a look at all the folks who want to be able to just want to watch what they want, when they want to watch it , where and on the device they want to watch it. They want TV Networks to go ala carte.”

    No they don’t. They just want a business model that offers minimum subscription rates and more choice in paid content. Not much different from how cable or satellite is priced today except there is not the entry threshold stepped to begin at $40 plus all the additional nickle and diming that goes on with other TVs in the household, dvrs, etc. Any decent package is going to cost $100 to bring in the minimal content concerning sports, movies, news and entertainment. Shoving 500-600 channels in to provide so much value that the $100 seems worth it is a losing value proposition in the face of alternative means of getting those things at a much lower price point.

    The internet is disrupting the extortion racket consumers have had to put up with as they are asked for more and more money to pay for less and less relevant content.

    Look at what’s happened to HD content. It used to be treated like another premium package (maybe it still is at DirectTV, I haven’t checked in awhile). Other than HDNet😉, all the educational channels really didn’t provide the Sports and Movie experience people wanted that they had to pay separate subscriptions for.

    People see the aggregation racket for what it is, a necessary evil to get the smaller percentage of content they really want. As alternatives emerge to enable this, the cost of buy-in to a platform has to come down with the cost per channel going up. I think HBO and Showtime are perfectly positioned for this as they produce their own shows to fit in that type of model (as well pure ala carte models at premium prices). Eventually, entertainment may become more like a razor blade business where entry to the platforms are nearly null with the money coming from the content and the devices they are locked into imo.

    Comment by kite1956 -

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  11. The scary part for me is how the supposedly more “sophisticated” younger audience can’t tell the difference between watching a professional sports match-up on a real tv versus the internet.

    Baseball is a JOKE to watch on the internet. I doubt that it is more than 15 frames per second, and when it comes to tracking the swing of the bat or a close play at first base, fogedaboudit. It’s absolutely not the same thing watching a sports event on a computer monitor versus watching it on cable, however, as more people dumb down their own ability to tell the difference, we will get the dumbed down version and lose the better alternative.

    From MC> baseball streaming works on the internet for one reason: Day games. if the Cubs didnt play so many day games, the business would be upside down

    Comment by Alessandro Machi -

  12. The cry for ala carte largely comes from people not wanting to pay for services they’re not using. People enjoy YouTube and Vimeo all day for no more than the cost of their internet connection and watch thousands of Netflix movies for $9 more per month.

    They open their bill once a month and see $30-60 for internet and $50-100 for cable and they feel ripped off. So they cut the cord. A lot of college grads aren’t even bothering to get cable as they enter their new lives. Hooking a PC up to their entertainment system next to their Wii and XBox360 (all three running Netflix) more than makes up for what cable brings to them.

    If people can get the same entertainment at a cheaper rate over the internet, why wouldn’t they cut the cord?

    Finally, CDs are an aggregate compared to iTunes’ ala carte. Anyone who’s looked at a 10 song CD for $15 and opted to go to iTunes and get the 2 singles they want for $1.98 knows this.

    From MC> CDs may look like an aggregate, but they arent sold as such. They are sold singularly. if labels had let you order and keep as yours, up to 5 CDs per month for 12.99 per month, or some comparable deal, that would be aggregating and Itunes never would have had the level of impact it had. Then that same deal could have evolved to what spotify is today. But labels stuck to selling CDs one at a time

    Comment by FutureToob -

  13. You could also argue that each channel (ABC, CBS, ESPN, etc.) are aggregators. I don’t really care to watch bicycling on ESPN, I want College Football. So, even if the viewers want to go ala cart on channels, they are still stuck with all of the programming.

    Apple has done exactly the opposite – they’ve gone super ala cart: You can download individual songs (they realized you didn’t want/need to by the whole album) and even rent TV shows. Sure, they aggregate where you can consume the content, but the content itself is VERYala cart.

    Sorry, you’re wrong on this one.

    From MC> No im not. Your song requires you to go through ITunes. Although there is ITUnes for non Mac products, 99pct of Itunes usage is on MAC products. They get their “subscription price” from the up front purchase of hardware and locking you to Apple. You cant buy “anything you want from Itunes” and play it on “any device you want”. That would be ala carte.

    Nor can you buy any content you want and play it on any Apple product you want (without a whole lot of hassle that most people cant and wont do). So my examples still hold

    Comment by chiphanna -

  14. What HallMark could do is align themselves with other “independent” brands and approach the cable companies on a united front. But lets not forget that the whole issue of who pays whom is not a given, or is it?

    In theory, channels are supposed to self fund through their own commercial advertising and should not need the crutch of a pay per viewer fee to “survive”. On the other hand, channels that provide new programming, live programming, and even have recognizable hosts (like ESPN) will demand a fee to appear on a cable channel.

    Comment by Alessandro Machi -

  15. Clearly very valid arguments, but I can’t help but factor in the revenue is king mentality that plays heavily in this as well.

    Take for instance blockbuster video, how long did they operate at sky high margin by exploiting the market and their customers. When the competition entered the market place was the time to respond by reducing overhead and changing their model.

    CD’s are going a similar route, with the market driving towards consumption based on demand & convenience, via paying for unwanted content. Cable won’t be far behind if they fail to take internet content seriously.

    Ultimately, the in all of these examples and moving forward consumers want the lowest prices and most convenience (there is always some trade space), I just can’t help but think if there was a greater willingness to adapt business model that regardless of ala carte or aggregate service that success can be sustained.

    Comment by bsox14 -

  16. Generally speaking, the bundling of cable networks is bad for the consumer. I want the NFL Network on my cable system, TWC, but can’t get it. Why? Because they don’t have the leverage of bigger companies, like Disney, News Corp, etc…

    TWC tells me that they don’t want to pass the cost of the NFL Network onto their customers. Let’s say that the NFL Network costs $8 a subscriber (I don’t know what the actual cost is, but understand that not everyone wants another sports network). Well, the NFL Network has little influence to get TWC to carry its channel. Disney, on the other hand, can spread the cost of its sports licensing fees across ESPN, ESPN2, ESPN Classic, ESPN Deportis, ESPN U, and ESPN News. In theory, the same $8 is spread across all six brands and gives the illusion that ESPN is much cheaper. The reality, I might only watch ESPN.

    Now, News Corp is in a big battle with Cablevision to raise the licensing fees for each of their brands, especially FOX. For the time being, all of News Corp’s brands have been pulled from Cablevision (for nearly a week now). Before that, Disney did the same thing with TWC and got significant increases across their brands. In short, the media companies have too much leverage and will continue to push cable operators to drive up the cost of cable packages to the consumer.

    Meanwhile, independent brands, like Hallmark and even your own brand HD Net, have little or no leverage to compete. What happens to those brands? Do they get swallowed up by the bigger cable networks? Or go dark? Personally, I don’t think that it will be long that we start to see a backlash against the current model.

    Instead of looking at other media as model to how the business will evolve, maybe, we should look at the telecommunication industry. It wasn’t long ago that everyone had a landline and was locked into one choice for their service provider.

    Now, the cord has been cut for voice related products, as people are rely more and more on cellular service. In the mobile world, people have the option to change service providers every other year or so and retention seems to be the biggest challenge.

    Don’t you think that people will be able to find their entertainment from Netflix and a handful of internet sites? There will be a time, when the greed of the content providers will create a way to break the old model and perhaps the system as a whole.

    From MC> Most people dont want to work that hard for content

    Comment by avm23 -

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  18. “Explain to me why they would want to do that ?”

    They won’t. That’s why its disruptive.

    Comment by rsholl -

  19. The prior two comments I am not in agreement with. I called up my cable company and asked to add two channels. I had to buy two tiers to get the two channels. The cost was only 5 dollars per bundled tier, but I really only wanted the two channels that I wanted.

    I offered to pay 1.99, then 2.99, I might have gone to 3.99 for each of the two channels I wanted, and AVOID all the additional choices. It seems like this would be a better deal all around. But in actuality it isn’t for the cable company. If Cable buckles and only sells me my two channels, even if the rate is astoundingly high compared to a bundled tier deal, their overall viewing base is lowered for dozens of their other channels, which in turn affects advertising rates. The reality is, even though I only wanted two channels, I will inevitably be channel surfing and will end up other channels that I did not want, which why bundling is important.

    Comment by Alessandro Machi -

  20. Whether it is ala carte or one subscription model depends on the industry, brand and value proposition.

    For instance, I am quite happy with my daily dose of Wall Street Journal. I pay $15 per month and I actually do not have time to read it all.

    Now, would I pay $30 per month for WSJ, Forbes, Business Week, etc. all under one subscription fee? Most likely not since I can get a lot of their information for free.

    The problem with cable is that there is 500 channels and nothing to watch. No, I am not happy with the way they bundle their services. For instance, I don’t care about the golf channel or tennis channel. I am not interested QVC either.

    I do like business channels and all the soccer I can get. So, why don’t they let me choose 25 channels out the idiotic 500 channels at some price XX. I would be happy to pay that.

    Bottom line: subscription pricing over ala carte works but not always.

    Comment by entrepreneurdex -

  21. Mark, this post is a huge stretch. The fact that you, a TV guy, have written 3 posts in a handful of days about how the internet isn’t disrupting TV just proves that the internet is disrupting TV.

    AppleTV iTunes streaming is a la carte. You don’t have to own a Mac or an iPod to use it. It costs $99.

    Amazon VOD (which you ignored, strangely) is a la carte.

    I think people want a mix of a la carte and packaged deal. No one wants to pay 99 cents per episode of a TV show on a regular basis. So Hulu Plus can easily be competitive when it gets the right price point.

    What people DON’T want is to pay an extra $20 per month for a “sports package” when they just want one specific extra sports channel. Or pay an extra $20 per month for the “privilege” of recording a show onto a hard drive that they then have to navigate using an atrocious user interface that was designed in 2003 by people who knew they were going to win anyways because they already had the consumer trapped so why bother making a decent product.

    Mark, you’ve turned into a huge supply side guy. When you write about TV, you never touch on what humans want. You instead focus on distribution. Not that distribution is unimportant. But distribution is more likely to bend to consumer demand than is consumer demand to bend to distribution problems. That’s the joy of the market. Consumer focused companies win.

    What consumers are doing right now is choosing a product that is very sparse on features overall (the internet has FAR less content than TV, the internet CAN’T compete on picture quality) because it does have 1 killer feature that TV can’t or won’t match. The ability to choose for themselves what they get. 12% of Roku owners have cut the cable. That number is rising and will continue to rise across devices. This is happening.

    Comment by mateo2 -

  22. Jerry, I’m not so sure that TV is dying. When you view the internet trending topics, don’t you wonder what drove the trends into the top ten? I have a suspicion that it is actually television news that drives many internet trending topics, people see what is trending, and go to internet sources to read more. But it still might have been TV that actually generated the trend.

    Comment by Alessandro Machi -

  23. While I think this is a fascinating explanation of disruption versus aggregation, one thing about the examples that are used early on is the vendors that sold ala carte may not have been cutting edge enough in aggregating their own product inventory.

    Comment by Alessandro Machi -

  24. Okay, so the Internet is not disrupting TV. DVR’s are disrupting TV. Different disease. Still dying.

    Comment by Jerry -

  25. I don’t watch enough terrestrial TV to justify the hefty subscription fee–or at least I THINK I don’t until that sporting event or new TV series or company comes over and you wanna to see something they wanna see that you’ve probably never seen but don’t mind seeing just this once. At times like those it makes all the sense in the world to pay for the package, but I’d Love to subscribe to ESPN, CNN, HBO and a few more networks and actually SAVE money on my cable bill but that would actually costs me MORE.

    Comment by milesmaker -

  26. Mark, your assessment is correct, and traditional TV should dig in its heels if it thinks it can maintain this lucrative scheme for the long haul. I just don’t think it can. Netflix and Spotify work because they provide a metric TON of content for a very low price. You can get what you want without feeling as if you are paying for a lot of stuff you don’t want. You ARE, of course, but the amount you pay is what you would normally pay a la carte anyway. My family watches 10 movies a month, I am getting it at less than the current a la carte prices.

    Not so with cable TV. I honestly DO feel as if I am paying for a lot of content I don’t want. What I would pay a la carte, at the going rate, is a fraction of what I currently pay for cable. The only reason I stick with cable rather than go Hulu/Roku/Google/AppleTV + Netflix is live sports and a degree of inertia. Once the live sports thing gets worked out, I will cut the cord.

    But, you are absolutely right, there is nothing in it for the cable industry in giving the people what they truly want. But eventually market pressures may force it. As people start dropping cable left and right, they only choice will be to start dropping prices just as fast until they find out what the market will bear.

    Comment by vancemac -

  27. I did not subscribe to cable/tv service in the US because I want ala carte. I don’t need 500 channels. I don’t want 500 channels. I want ESPN, Discovery, TLC, History, FoxSports, Versus and that’s it and I’m happy to pay for just those channels. Surely, there are enough people like me, customers that aren’t paying ANYTHING because they don’t want EVERYTHING, to make at least having an ala carte option worthwhile?

    Now that I’m living in Peru, I will get cable because Hulu/Netflix etc, don’t work here.

    Comment by Bradley Joyce -

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