The argument for unbundling cable TV and offering consumers greater channel choice is gaining momentum in Congress and on main street. But an Advertising Age article by Jeanine Poggi notes that observers believe the change would hurt the smaller channels plus raise ad rates at the surviving stations. Regardless, as streaming video from Internet channels like Netflix continues making inroads, the marketplace may be shifting with or without lawmaker’s consent.
The music industry already suffered an unbundling of sorts with the transition from 10-song albums to individual digital tracks. The change ravaged revenue streams and business models. Interestingly, the music industry now seems headed toward a subscription-based streaming model which, if it were to gain critical mass, partially mirrors cable’s present-day bundling model.
According to Needham analyst Laura Martin, as much as $70 billion or 50% might evaporate from the TV ecosystem under an unbundling scenario, half from subscriber fees and half from advertising revenues leaving only about 20 channels able to attract enough fees to survive. The music industry has also seen its U.S. sales fall 50% over the past decade and consolidation from six to three major labels.
ESPN is perhaps the poster child for the lucrative cable network bundling model. ESPN receives about $6/month from 100 million homes or about $7.2 billion annually. However, Martin estimates only 33 million would choose to pay for the network and only 20 million are heavy sports users. So to maintain its $7.2 billion in subscriber payments, ESPN would have to charge 33 million customers $18/month. Furthermore if subscriber counts dipped below 25 million the channel would then lose an additional $3 billion of ad revenue.
ESPN’s value comes from the fact that all subscribers pay for the bundled signal whether they watch it or not. What would happen if all Internet users paid a small monthly fee for music regardless of how many songs they listened to? Under that scenario, massive amounts of money would be generated to better compensate intellectual property owners at low per household costs. Some Internet users who don’t listen much to music would be upset, but how is that any different than the estimated 66 million cable users who don’t watch sports, but are paying $6 a month for ESPN anyway?
If it works for cable, why couldn’t it work for music? Why can’t music be like ESPN?