However, the transition is no more than half over. Networks, for the most part, are still broadcast era artifacts that have simply replaced local cable distributors for the old local affiliate broadcasters. Even the new networks, such as U.S.A., Fx, Syfy, etc., though never broadcast networks, still reflect that structure.
We need to take a step back and see that television has two relationships with its audience that are really quite different. The first is the premium relationship that actually exists between the producer and the viewer. For example, The Good Wife is really a relationship between Robert King, Ridley Scott, et alia and the viewers. The second is the rerun library service, such as Netflix. In both cases, the cable distributor is of no use and the Network now provides no more than marginal value added.
The first run producer has two basic needs. First, save for those who are very established, funding for a new show is needed. Networks no longer routinely provide funds directly. Rather, funds are acquired to produce a pilot. That pilot is then shopped to networks. A network may purchase 13 or more episodes and that contract is used to acquire the remaining funds required to produce the show. Ultimately, what the Network brings to the table is cheap and nearly universal access to viewers but, today, little more.
To put it simply, if you are a fan of Elementary, your allegiance is to the producers of the show, not CBS. If CBS cancelled it and it started being distributed elsewhere you would have no thoughts of loyalty to CBS You would go to wherever Elementary was being offered. This is one of the strategic problems that networks have - almost zero brand value.
One of the problems with the network business model is that the budget available to the producers is determined by the number of viewers that the network can attract multiplied by the amount that advertisers are willing to pay in order to talk to a viewer. The perceived value of the show by the viewer is irrelevant.
Internet delivery is different since it is the viewer who determines the value of an episode. If the show's budget needs to be $2.00 per episode, in the Network universe, the show is dead. If viewers are willing to pay $2.00 per episode in the Internet universe the show may continue. This ability for a highly committed subset of viewers to support a show will, over the next decade, completely transform the industry.
The beginning of the end for Networks will be when a show that they cancel, rather than going out of production, continues to be produced at a per episode fee and is marketed through Amazon, iTunes, Netflix and blogs and magazines with proper demographics. If the marketers 'take' is less than that of the Networks, the 'producer to viewer' business model will grow and the network business model will die or more likely transform.
Today Netflix, Amazon and Hulu provide access to programming, mostly shows in syndication. Netflix provides some limited original programming. This business model needs to change as well. The problem is that your subscription pays for programming that you don't want to watch. As a customer, it is in your best interest to subscribe to a service whose subscription base is homogeneous and whose viewing preferences are most like your own.
Over the next five to ten years, the broadcast and cable networks, Netflix, Hulu, Amazon and some new entrants will converge on a business model that will offer a monthly subscription that will provide unlimited access to a library of syndicated shows and older movies along with episode or season pass purchase for new shows, video magazines, sporting and other events. Right now, with Amazon Prime and Instant Access, Amazon is the closest.
Over time, because of the market pressures mentioned, these various Internet TV providers will each find their own niche. As they do, they will collide with Internet sites that already serve the niche and will find it profitable to offer Internet TV. An example is Huffington Post. It already has a sophisticated web presence with over 100 million unique visitors and a strong urban, college educated, 'soft Left' profile. 'HuffTV' would be a relatively easy start up.
There will be some interesting transitional issues. At market maturity there will be a number of enterprises each of which will have access to a specific demographic. They will offer a first run and rerun library specifically tailored to its subscribers. However, at present first run contracts and syndication ownership does not conform well to a market niche segmentation.
For example, the new subscription service offered by CBS, through its CBS Television Distribution, owns an impressive library of syndicated shows that will make it an instant contender in the streaming rerun market. However, much of it doesn't match well with its current first run lineup that skews heavily to the more intellectual crime/investigation genre. On the other hand, websites that have a strong market niche presence, such as Huffington Post, will need to acquire both a syndication and first run library.
While this will lead to a period of increased acquisition and divestiture, it has been the general pattern, albeit at a lower level, with syndicated shows in the past and doesn't cause much of a change from business as usual. The significant change will be with first run shows. Because networks have controlled the industry in the past, first run shows have traditionally been exclusive to one network. As producers take control of the industry, they will see benefit in striking distribution deals with several distributors.
Polymathica, though targeted at a much smaller market than Huff Post, still represents a wonderful opportunity to enable refined, erudite programming that in today's market simply couldn't get produced. It will simultaneously enable several thousand Knowledge Class Polymathican careers. Additionally, most shows will be financed through crowd funding which will provide high return potential to its small investors.
So, this impending development is significant on two levels as investment intelligence and as career opportunities. First, television is a growing and volatile industry that has been dominated by a handful of companies. While cable television is going to die, the same companies typically provide Internet service. As people transition to Internet TV, they will need to upgrade to higher bandwidth service. While cable companies may see their revenue decrease, their operating income may actually increase.
The broadcast and cable networks will need to choose a market niche. While that means that their viewership will almost surely decrease, their revenues may actually increase. An ad supported show will typically generate about 60¢ per viewer, which must be shared with a cable, satellite or broadcast distributor. A show that is distributed over the internet via a season pass will typically create $2.00 to $2.50 of revenue and the distribution costs decrease.
While the industry is in turmoil, it does not present much in the way of investment opportunities. The existing mainstream players will lose viewers, but will increase its revenue and income per viewer. When I wrote the 1999 article, I thought that AT&T was in the best strategic position. Now, it appears with the acquisition of the NBC family of businesses, Comcast may be best positioned.
The real opportunities will reside in new, smaller market niches, such as Polymathica, whose viewers were disenfranchised in the cable TV era, but will be enabled in the Internet TV era. PolymathicaTV will be joined by ZeitgeistTV, PolyamoryTV, ChristianTV, GothTV, AryanTV, AynrandianTV, SingularityTV, etc. that, in total, will likely capture about 15% of the market.
I estimate that PolymathicaTV will capture about 0.7% of the market, or about 15 million people. PolymathicaRerun will, at this level, generate about 1.4 billion USD in revenues. The majority of this revenue will accrue to the owners of content. PolymathicaTV should be able to support about 100 shows at an average of 1,000,000 viewers. This 4.5 billion USD of annual revenue will support about 2,500 FTE career opportunities.
It will also create impressive private equity opportunities as well. Creators of a show will acquire enough funds to produce a pilot and some marketing funds, say 1.0 million USD in the anticipation that some viewers of the pilot will purchase a season pass which will generate sufficient funds to produce the show. Most participants in the project, including the creators, will be paid scale or siilar, against a percent of revenue. This allows low risk and potentially high returns for both investors and participants.
Skills needed for a successful team include:
- Musical composition
- Special effects
The principals will typically have mastery of several of these skills. The deal structure will usually be gross margin = Revenue - non-equity expenses. The Gross Margin will be broken into 10,000 shares and allocated to the equity participants.
Crowd funders for most projects will have a 1,000 USD minimum investment requirement, with $500 increments above that. They will be pitched with a proforma statement. For example, the show may anticipate one million viewers with an average season pass of 45 USD. Distribution services takes 25% and non equity costs are 4 million USD for a gross margin of 29,750,000 USD or 2,975 USD. A 1,000 USD investment, receiving two shares, will earn 5,950 USD per year for the run of the show. If the show gains 1.5. Million viewers the 1,000 USD investor will receive 9,325 USD per year for the run of the show.
Because of the nearly immediate high return potential and the small amount risked, investors do not need to be risk averse. An investor who invests in five projects in a year and hits on one will be cash flow positive the first year and have 100% return for the run of the show. Because of this, a lot of pilots will be produced which can be laid off to the rerun service if they don't succeed thus reducing risk.
This is an exciting end game scenario that creates thousands of opportunities within Polymathica and tens of thousands of opportunities in other market niches. Readers who are interested in polymathicaTV either as a participant or investor should subscribe to The Polymath.