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What’s Bad About TV? Just Ask Apple.

  • Compensation is easy to figure out. Assuming History fetches a healthy CPM (cost per 1,000 viewers) of $15 for a commercial currently reaching the full 4.5 million viewing households for a new prime-time episode of Pawn Stars, then a 30-second slot within the show would command a price tag of at least $67,000. If that’s the case, the channel’s owner, A+E Networks, would forego $1,500 in revenue for a 30-second commercial spot (reflecting erosion of 3 percent of the audience at a $15 CPM) by letting Apple send out the program commercial-free to a sliver of the pay TV universe. Left is the number Apple would have to hit with a reimbursement program. In fact, because of the strategic risks involved, Apple would probably have to pony up a premium to convince A+E that the whole gamble is worth it. If that’s the case, A+E would have actually increased its net revenue take from a commercial slot within an episode of Pawn Stars. Remember that Apple, like every other multichannel video distributor, would pay a license fee to carry the program in addition to forking over the advertising-compensation fee.
  • Those are the basic economics. See, kids? They’re not so scary. The consumer side of the story is actually what’s more interesting. In floating the idea of a commercial-free pay TV bundle, Apple is addressing the elephant in television’s room, which is the fact that lots of people have serious relationship issues with TV commercials.

    Don’t take my word for it. Here’s Michael Bologna, managing partner director of emerging communications for the ad-buying agency Group M, from a panel I moderated at The Cable Show in June. “If I could, I would watch TV without any ads. I hate them,” Bologna deadpanned. “But with no ads, there would be no programming and we’d all be playing Scrabble.”

    He was exaggerating to make a point. But it’s still a valid point, and anybody who has sampled the experience of television without commercials is likely to agree. As a personal experiment, I’ve been watching commercial-free television for the past several months almost exclusively from providers such as Netflix and Apple’s iTunes. I’ll vouch that once you go there, it’s tough to go back.

    Watching episodes from the latest season of AMC’s The Killing via iTunes, sans commercials, produces a gripping, nonstop immersion. Going back to the ad-supported network version, with its predictable interruptions for pharmaceutical and hair-product ads at every dramatic zenith, is torture. Knowing that, I get why Apple has advanced an idea that seems utterly outrageous from the posture of TV industry tradition. It suggests a much better experience, so much so that I suspect a reasonable number of people would be willing to pay the bundle premium that an ad-free television environment is certain to demand.

    It’s outrageous, preposterous, disruptive and threatening, yes. But so was the idea of putting Web pages on a little handheld phone in 2007. Look where that got us.

    — Stewart Schley, Principal, Stewart Schley Content
    Stewart Schley writes about media and technology from Denver, Colo.

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    albreznick 8/27/2013 | 1:08:50 PM
    Re: Depends on your point of view It certainly sets up a lelluva battle--Big Advertisers vs. Big Technology Firms like Apple. Can TV survive without its traditional advertising business model? i don';t know. But I'd love to see what would happen if Apple really does pursue this path. The whole business could use a good shakeup. Do you think Sony, Intel, Roku and the rest will follow Apple's presumed new model?   
    mendyk 8/26/2013 | 7:42:24 PM
    Re: Depends on your point of view Right, and from the POV of most commercial content providers, the current ecosystem may be dystopian, but it makes them plenty of money. I'm sure that video content producers are looking over the fence to see what has happened to the music business and are thinking, Please, not us.
    brookseven 8/26/2013 | 6:34:13 PM
    Re: Depends on your point of view  

    I thought the purpose of any business had exactly one aim...MAKE MONEY.  The only difference between businesses is HOW they try to make money.  So the point of making video content is to GET RICH.

    TLDR:  Money Talks, BS Walks.

     

    seven

     
    mendyk 8/26/2013 | 6:03:36 PM
    Depends on your point of view If you take the view that video content exists mainly to enlighten, inform, and entertain the world, then it makes sense to look for ways to decouple content from advertising. But if you think that the main purpose of content is to sell people cars, sneakers, personal hygiene products, etc., then that decoupling doesn't make sense. This isn't simply about disintermediating advertisers from the video stream. There's a whole economic ecosystem to consider.
    brookseven 8/26/2013 | 5:18:46 PM
    Re: Commercial-free TV programs could work for ALL Pay-TV and OTT services Sure commercial free could work....let's just remember that on iTunes the HD version of Breaking Bad is $22.99 a season, $37.99 for the Deluxe Edition per season or $2.99 per episode.

    Let's do some math...For TV service of 2 hours per night (and I will use 30 day months) we are talking about $90/month for video.  Maybe that's high...maybe not. But that is where it is and does NOT include Broadband Service.  I just looked and a very basic Comcast package (without a DVR) is $34.99 a month.

    So, really a commercial free service would probably have to provide 25+ channels at $25 a month or something like that.

    seven

     
    gkkearny1 8/26/2013 | 2:35:36 PM
    Commercial-free TV programs could work for ALL Pay-TV and OTT services This is actually a service MANY consumers have been asking for. The "gotcha" for an advertising-free service is each network probably requires a new and different play out center. It may start out as an all-on-demand file based system, but with original programming, there will be opportunities for pay-per-view "live" viewing of events, sports, and upscale programming. Apple, Intel and Comcast are all in position to build these types of play-out centers, and there's no reason why Apple or Intel couldn't re-sell content from their platform to the greater PAY-TV industry. Commercial-free TV supported by a premium subscription package can work for ALL of the Pay-TV and OTT services over time.
    DanJones 8/26/2013 | 1:40:37 PM
    Device So they still probably need a compleling device to make this real?
    stewartschley 8/26/2013 | 12:46:35 PM
    Re: Apple Bucks Dan, In Apple's case, both. I think the economics of the "virtual MSO" model are tricky, but could be compelling if you are willing to believe somebody can assemble a significant subscriber base. For instance, 3 mil. subscribers at $49/month (just guessing) yields roughly $1.8 billion in revenue annually. Granted, the programming licenses will eat you alive, and could amount to as much as 70% of revenue if Apple or somebody else pays a premium to reduce the commercial load. Even so, infrastructure, customer acquisition and customer care costs are much lower than in cable/satellite TV, so presumably there's still a cash flow margin at the end of the day. It's probably not enough by itself to move the needle much for Apple, so it's critical to have a hardware/device revenue stream tied to the service in a controlled ecosystem ala iTunes/iOS. That way it may actually be possible to make some money. I suspect Intel sees it the same way.
    Sarah Thomas 8/26/2013 | 12:34:34 PM
    Content binging Interesting post, Stewart. How consumers want to watch TV is certainly changing. I was also interested to learn Netflix's model for its own TV shows like House of Cards was to release the entire season at once. That's a lot of content without commercials, appealing to how consumers like to veg out and binge on content at their whim.

    I think getting rid of the commercials is a great idea, but it does seem like a huge overhaul and one that the cable networks would be really uncomfortable with for awhile to come.
    DanJones 8/26/2013 | 12:16:23 PM
    Apple Bucks How does Apple make money though in this model? Selling the device, the service?
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