Paid and Free

Capsule:  Is the cable industry the new media example of how to grow profitably?  The same subscription revenue that used to seem old-fashioned, anti-consumer and limited is now making cable the model for the future--provided it continues to support new products.  Is cable's prescience already inside its stock price or are there better days ahead? 

GrowingAudience


The debate around paid versus free content isn't getting any easier, maybe because of its emotional core. The ideal of free content on every device is about everyone getting a piece. It's not about building businesses, paying people or any capital model we can understand. It's not about advertising; in fact the pressure for content to be free has done more to hurt the advertising business than Google.


Free content is conflated for some with a free press. It is open-ness and freedom of expression. It is an enchanting evolution from the hierarchical business and social models we've grown up respecting, allowing reality tv shows and blogs to seem as important as fine drama, incisive debate and newspapers because we decide. Free is a post-socialist, post-World War II, post-Watergate fantasy with new energy post-Iraq, Aghanistan, detainee torture and wiretaps.


We can't live on free content any more than we can live on love. Someone somewhere has to pay for the distribution and the content makers and the distributors have to earn money for us all to eat. The idea that "the someone" paying for content and distribution will be the advertiser is fanciful and destructive. The content businesses that have thrown their content onto the heap of this idea have paid dearly.


The assumption that advertising rates will continue to increase to cover exploding content and distribution alternatives is counter to our direct experience over the last five years. Media companies have participated in their own decline. We've all participated, consumers too, in the drop in advertising value brought on by the ingenuity, efficiency and size of internet search, led by Google.


Google has something we all want--a huge targeted media presence that every business can buy a piece of--and Google has grown like an explosion by keeping media placement rates low. They've built and manage an ingenious virtual media universe. In order for their universe to work, media has to be efficient and cheap. For the consumer and for non-media companies, what's not to like? Google has run the tables on media rates for most of the last five years and has driven them so far down that whole content businesses have begun to lose their foundations. Google's growth on this new media efficiency has made them huge and therefore essential, so essential that media content and distribution companies worship at their altar by paying into their virtual media universe as their biggest clients.


It's a little bit like what just happened with the banks. Everyone wanted to believe that interest rates would stay low forever and equity and property values around the world would continue to soar. In a manic frenzy, everyone lost their heads and the folks in Congress and at the Federal Reserve who were supposed to be watching the store were leading the happy parade. That happy misguided parade has taken trillions of dollars out of the economy--because someone has to pay the tab, including for those essential Fed disbursements that have shocked the credit system back to life.


Our economic woes are just like the media's manic frenzy over free content and an ever-expanding advertising market. In reality that ad market has been flying apart for years while we continued to compound the problem. Our major media businesses felt the chill from Google's impressive, determinedly efficient media placement rate pressure, and they threw their content on the fire to warm the room.


One industry that kept its head in the frenzy has been cable. The same folks who brought the world pay television continue to bring it on. And the world continues to spin, flowers bloom, people get paid and the industry does well. Cable may not do as well as it deserves to do in the equity markets, especially when you consider that its revenue and profits continue to appreciate--without bankrupting widows and orphans--and it hasn't destroyed the value of other businesses along the way. Cable has been rewarded within the US economy for this important virtue. Even broadcasters, who once claimed to see their imminent demise at the hands of pay TV--pay for the SuperBowl? UnAmerican!--have seen their content and revenue potential increase while conceding their network and syndication monopoly to a differentiated media universe.


And cable has nurtured competition. The US cable industry begat its main competition--the satellite industry--helped by the Federal government who required in the 1980's that cable share its programming with satellite. Cable stepped out of a Roman myth in this regard: it gave birth to a second industry determined to be its destroyer and ended up making enough, especially in terms of the increased value of content and alternative means of distribution, for everyone to prosper.


Cable has even helped the telephone business. It bought AT&T out of its mistakes in attempting to become a cable MSO. Then, of course, the cable industry "stole" a lot of wired telephone customers. But, it won those customers by expanding voice-over-internet-protocol as an efficient alternative to circuit-switched telephony and handed the phone companies an important motivation to modernize their businesses. It's doubtful that our major phone companies will go under because of their loss of land lines to cable. The telecommunications industry has done more to cannibalize itself with wireless technology than cable distribution has done to destroy AT&T's or Verizon's long-term prospects.


Why has cable maintained its success in the face of a real media universe where the pace of development is often breathless? Cable understands the bottom line of its business: its two-tiered revenue structure that includes advertiser support and consumer engagement. The cable industry works harder for its customer--the US consumer--than Google does. Cable depends on consumers, their monthly payments, their eyeballs, their loyalty, their constancy through fast-moving cycles of technological change.


The media business--now composed of digital media companies and traditional-plus-digital hybrids--would do well to strengthen its backbone and effect a cable-like discipline. This next media revolution can start with being unafraid to admit that content and distribution both require strong consumer commitments--as in, you give me a service and I pay you for it--to survive. Maybe common sense can finally quell the starry-eyed fantasy of free content for everyone while content companies are losing their shirts.