How Much is the TV Business Model Really Changing?

Watching the Emmys this past weekend, I thought about how weird it is that we spend so much time obsessing about and celebrating stuff that's basically created to make us watch commercials. But then I wondered, is that even true anymore?

With HBO's Game of Thrones and Veep taking home top honors for drama and comedy, and Netflix and Amazon continuing to put up strong showings, we're moving out of the era of content-for-eyeballs and into a more brand-centric model built on a-la-carte offerings and prestige content. It makes sense that this is happening at the same time that the quality and artistry of TV is outpacing movies. Ad-supported content is infamously created with a "least objectionable programming" approach: just get lots of eyeballs and don't alienate anyone. Quality is good, of course, as long as it gets viewers. But the more a network relies on its ad revenue, the fewer risks they tend to take in their programming choices. 

TV's business model used to be pretty straight-forward: The "free" broadcast networks (ABC, CBS, NBC, Fox, CW) are mostly ad-supported. They're "free" insofar that you can get them with an over-the-air antenna; you don't need cable or a premium subscription. This is still basically true, and these broadcasters make most of their money from selling commercial time to advertisers. This business model also means that broadcast networks tend to choose bland but solid ratings-getters over edgy but barely-watched shows. Higher ratings equals more advertising revenue.

In the 1970s, cable and satellite TV came along and ushered in the first big change in the TV business. At its peak in 2010-2012, 87% of households had cable or satellite TV which delivers, on average, almost 200 channels into homes across the US. Most cable networks also show commercials, but these are not the only revenue stream. Cable networks also receive a "carriage fee" from the cable or satellite provider. Comcast, Time Warner, DirecTV, etc. will pay each cable network a set amount per subscriber for the right to "carry" that channel in their offering. ESPN is the infamous leader here, costing each cable subscriber about $6 a month, whether or not they watch it. 

Cable's dual revenue stream means that they've tended to embrace more interesting and challenging content. This kind of prestige original content may attract a smaller audience, but it has two powerful effects: 1) These audiences are often highly loyal, engaged, and outspoken. 2) Prestige original content can be a powerful brand builder for smaller cable networks.

AMC is a fascinating case study here. The network basically used to do what it says on the tin: show "American Movie Classics." Its first original drama Mad Men premiered in 2007 was a hit with critics and went on to win 16 Emmys over the course of its run. The highest rated episode for the series (and AMC's highest rating ever, at the time) drew in 3.5 million viewers. To put that in perspective, the current top-rated show (The Big Bang Theory on CBS) pulls in about 20 million viewers each week. However, AMC followed up the success of Mad Men with equally lauded hits Breaking Bad and The Walking Dead and has used this original programming strategy to steeply increase its carriage fee over time. 

HBO's business model has essentially followed this blueprint for years. The network has always been a subscription "premium" network without commercials, first as a cable add-on and recently also as a stand-alone streaming offering. If you've been watching HBO in the last couple of weeks, they're showing an ad spot that brags that they have won the most Emmys of any network for the 15th year in a row. That's quite and achievement and demonstrates very succinctly how important their original, prestige content has been to building the HBO brand.

Netflix and Amazon have arguably evolved to operate on the same model: a strong brand offering premium content. Jason Mittell wrote in The Atlantic earlier this year that Netflix doesn't compete on ratings the same way traditional TV networks have to because advertising doesn't factor into its business model; it's entirely subscription-based. Releasing ratings information would be counter-productive to Netflix's goal of building itself as a brand with buzz-worthy offerings and a deep back catalogue that are worth the $10/month subscription price. Mittell explains, "For a subscription service like Netflix, where promoting a brand is equivalent to building value, it’s far more important to dominate the conversation than have millions of people actually watch its programs. Netflix has done a masterful job generating buzz, awareness, and demand for itself, meaning whether or not its programs are popular hits doesn’t really matter." 

While this approach is very different from ratings-driven broadcast and cable TV, it's also not entirely accurate anymore to characterize Netflix as a digital disruptor. Michael Wolff in Television is the New Television: The Unexpected Triumph of Old Media in the Digital Age argues that, while Netflix and Amazon may have started out pretending to be digital disruptors, they have really evolved to be more and more like conventional television in that they provide "old fashioned, passive, narrative entertainment." He makes an important distinction between television as a business model and television as a distribution channel: "TV the business model derives revenue from content pushed through a distribution channel also called 'TV.' The health of the distribution channel is a vastly different issue form the health of the businesses using it."

The biggest shift in TV as a distribution channel is that we are steadily moving from a primarily ad-supported model to an a-la-carte and subscription model that is marked by branding and prestige content. This is also the area that has been most influenced by digital disruption. Essentially, it's what we saw with the music industry: a-la-carte "why buy the whole album when I just want one song" buying behavior and the rise of subscription services like Spotify and Apple Music that allowed easy access to both new music and old favorites. 

On the other hand, TV as a content creation business is thriving. Instead of threatening traditional television, digital media has created additional revenue streams for TV as it opened up new downstream market. TV production companies have always made most of their money through syndication, and services like Netflix, Amazon, and Hulu became new outlets to syndicate full seasons of new and old shows. Digital downstream markets are arguably the biggest boon to expanding TV companies' syndication revenues since 1993's deregulation of the Financial interest and Syndication rules, which removed restrictions on how much of their own original programming networks could produce.

Ultimately, the key way that the TV business is changing is in how we watch TV -- on different screens and in more personalized ways (e.g. on-demand, binge watching). And yes, those changes are moving the business model away from creating unobjectionable, advertiser-supported content with mass appeal towards strongly branded, paid content with more niche appeal.

That being said, at the moment, both models are still thriving and are, in fact, creating multiple revenue streams for many TV companies. What all this means, at the end of the day, is that the TV business model is changing very much in some ways and, in other ways, not at all. The TV business is, fundamentally, about telling stories. And, if the critics are to be believed, we are in a golden age where TV in all its forms is doing that better than ever.