When Fox (NASDAQ:NWS) decided last week to block access to its programs by Google (NASDAQ:GOOG) TV, it was no big surprise since its broadcast brethren ABC (NYSE:DIS), CBS (NYSE:CBS), NBC (NYSE:GE) and Hulu had already done so. By speaking in a unanimous voice, the broadcasters have sent a clear signal that viewing their programs on TV, for free, via online delivery, is not to be. While they're happy to make Hulu Plus subscriptions available via connected devices, if you want to watch for free, you'll be restricted to computer, or limited mobile device-based, viewing.
A few weeks ago in the first part of "Broadcast Networks Are Wrong to Block Google TV," I speculated on what was motivating the broadcasters to block Google TV, boxee and other browser-based connected devices. In the case of Google TV, it's tempting to believe they are looking to extract payments from Google to distribute their programs. Another possible explanation is that programs aren't monetized as well in online as they are on-air (the "swapping analog dollars for digital pennies" argument). Yet another explanation is that measurement of online viewing is not yet fully mature, so they're worried that if their audience shifts to connected device-based viewing, it would hurt their ratings points, and consequently their ad revenues. But none of these are broadcasters' main motivation.
After speaking to plenty of people around the industry, the broadcasters' key driving force appears to be positioning themselves optimally for retransmission consent negotiations with pay-TV operators (cable, satellite, telco). The broadcasters have decided that their top priority is to have the strongest hand possible in these negotiations, and by being able to say they're proactively blocking connected devices from delivering their programs to TVs, they are able to argue pay-TV is the "exclusive" way to watch their programs on TV. That in turn helps insulate pay-TV operators from the threat of cord-cutting by their subscribers, which is one of pay-TV's top priorities.
It's a very legitimate argument, and to the extent that broadcasters have notched significant retransmission consent wins recently (Disney/ABC with Time Warner Cable (NYSE:TWC), CBS with Comcast (NASDAQ:CMCSA), Fox with Cablevision (NYSE:CVC), etc.), it would appear that the strategy is working, at least in the short term. However, what works in the short term isn't always what's best for the long term. And in this case, unless broadcasters shift their strategy at some point and allow their free, online-delivered programs to be accessible through connected devices on TV, in the long term I believe their current approach is wrong, for many reasons.
The most important reason is that the number one lesson the Internet has taught all of us is that creating friction between the customer and the product is a losing battle; customers will either find a way of illegally accessing the product (i.e. piracy) or will abandon the product altogether and seek easier/cheaper alternatives. As I argued in the original post, by blocking Google TV and other connected devices, broadcasters have created an artificial distinction between computer screens and TV screens that will confuse and frustrate viewers. Why should it be possible to freely watch a network program on a 27-inch iMac (NASDAQ:AAPL), but not a 23-inch Samsung (OTC:SSNLF) HDTV? It's a foolish differentiation that even my elementary school-age, but tech-savvy children wouldn't understand.
Younger people (mainly) will be inclined to turn to pirated sites to access the programs on TV while developing a sense of disdain for the networks and their silly, retro policies (recall the wrath that music labels received for their business practices that directly led to rampant piracy). Older/more mainstream viewers will simply seek easier viewing alternatives as connected devices proliferate, such as turning their attention to DVRs (where they skip the ads entirely), or to Netflix (NASDAQ:NFLX) (where their instant queues are well-stocked with their personalized, commercial-free choices) or to independent sources (YouTube, blip.tv, etc) commonly available through their connected devices or to non-TV pursuits like updating their Facebook pages, browsing the web, etc. In short, in an age where choices are bountiful, creating obstacles to easy product access is a road to oblivion.
It's understandable that networks want to emulate the dual revenue (ads + distribution fees) business model cable networks have long enjoyed. But the broadcasters are late to a party that looks increasingly like it's winding down. With yesterday's news that the pay-TV industry lost subscribers for the second quarter in a row, speculation is mounting that cord-cutting is beginning to take its toll. While there's still scant data to support that conclusion yet, common sense dictates that in times of economic distress, a high-priced product faced with cheaper alternatives is bound to suffer.
Conversely, the online video advertising business, which broadcasters are perfectly suited to exploit, is not only booming currently, it is poised for significant growth ahead. In the first half of this year, online video ad revenue increased by 31% to $627 million, the fastest growth of any online ad category. To be fair, that's a drop in the bucket compared to the $60 billion on-air TV ad business, but broadcasters' premium inventory is the most sought-after, and therefore will demand the highest prices. Creating more viewership and hence more ad inventory, should be a top priority. If Google TV and others can help achieve this, broadcasters should welcome, not block them.
Beyond the macro revenue growth, online offers advertisers all kinds of innovative formats that will drive higher engagement and ad rates. Just last week I watched Hulu's CEO Jason Kilar demonstrate half a dozen implementations that will have advertisers drooling. Yesterday I wrote about yet another new ad format, this time from Jivox, that cleverly integrates calls-to-action and measures each one as part of the purchase consideration cycle - things that no TV ad could ever do. Meanwhile, Freewheel just reported that the use of both mid-roll and post-roll ad placements and view-throughs is escalating, making online look increasingly like TV. Last but not least, recent consolidation among online video advertising providers means more scale and sophistication in the industry is just ahead. Taken together, there's ample reason to believe that online video advertising is going to draw huge attention - and dollars - in the years ahead.
From my standpoint, the broadcasters should be heeding the great Wayne Gretzky's advice, "to skate to where the puck is going to be, not where it has been." Gaining retransmission fees may help short-term P&Ls, but it's a backward-looking strategy. With online and mobile viewing exploding, broadcasters have a once in a generation business opportunity ahead of them. By walling off their content from connected devices, broadcasters are limiting their upside at a time when they should have their foot on the accelerator. I'm not sure what will get them to change their thinking, but if they don't there's little question their best days are behind them.
Disclosure: No positions