Beyond Cord Cutting

Gabelli Funds

Gabelli Funds
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Co-CIO, Value

Golden Rule of Media: Give the consumer what they want … when, where and how they want it.


While the consumers’ thirst for knowledge, connection and entertainment has gone unquenched for thousands of years, technological advancements have altered how that data is delivered, consumed and purchased. The progression from books to films to broadcast radio/television to cable/satellite expanded the menu of content; it took the internet to establish one-to-one, bi-directional customer relationships (potentially) free of intermediaries. Web 3.0, underpinned by the tokenization of goods and services, remains beyond the scope of this paper but nevertheless would reinforce the notion of decentralization behind four major shifts:

  • Increased consumption occasions. Time shifting and mobility have seemingly added hours to the day, changing the “when and where” of media. Overall video consumption rose from 6hrs 39mins in 2011 to 9hrs 15mins in 2021, but online/mobile now account for more than half all watching vs ~20% a decade ago.
  • Lengthening the “tail” of libraries. The ability to profitably create and serve a wide range of content has increased its value and abetted an explosion in content spending.
  • Globalization. Whereas once almost all media was local (newspapers and broadcast), content can now be seamlessly shared across billions of consumers around the world. The popularity of telenovelas in Eastern Europe and Korean hits in the West show that media is no longer just a US export and that enlarged content investment can be (and often must be) amortized over much bigger addressable markets.
  • New modes of monetization. Media generally evolved from customer purchases to advertising to subscriptions to cross-subsidization with other purchases. Media today is subsidized by all four in ways that can even be tailored to the individual.

It was the consumer, armed with digital weapons including DVRs, high-fidelity pirated copies, and mass distribution platforms (e.g. Napster, YouTube, etc), who led the charge against the prevailing twentieth century order of distribution and compensation. Many established media companies, reluctant to accelerate the demise of the old models, declined to go direct-to-consumer (DTC). Now virtually every media service sports a “+”. Cord-cutting, cord-shaving and cord-nevering, were nascent trends in 2010 that have become accepted realities, all with profound implications by what gets made and sold and by whom.

Table 1 US Multichannel & DTC Subscribers

Table 1 US Multichannel & DTC Subscribers

Content: Analog Dollars to Digital Dimes?

The deployment of modern cable systems in the late 1970s put increasing leverage in the hands of cable programmers, network groups like Viacom and Turner who often, but not always, also owned the content they packaged and wholesaled to distributors. Technology and regulation limited both the creators’ access to the consumer and the consumers’ access to the increasing amounts of content they craved.

As gatekeepers, the programmers were able to maximize profit (and valuations) by charging a compulsory monthly affiliate fee per subscriber while retaining the lion’s share of associated advertising revenue on their way to 50%+ margins. Not wanting to be competitively disadvantaged, cable and satellite distributors passed along the programmers’ annual rate increases while stuffing the bundle with more and more networks. It was a beautiful model until price reached a $100+/month tipping point of pain for consumers and the internet offered alternatives, first via piracy and then via Netflix and other services born outside the historic ecosystem.

Exhibit 1: “Many-to-Many” Approach, Consumer Gets the Big Bundle

Exhibit 1: “Many-to-Many” Approach, Consumer Gets the Big Bundle

With their near monopolies and monopsonies crumbling over the last five years, power has shifted to creators (IP-owners), who can reach the consumer in many ways, including directly and who now command dizzying rights fees and production deals. The consumer now has an even greater abundance of choice. Programmers began their race to the bottom (which we identified as a classic Tragedy of the Commons problem where everyone is made worse off by cheating), by placing/allowing free content on the internet and then by sheepishly adopting a “TV Everywhere” system modulated by the distributors.

Exhibit 2: “Many-to-Few” Approach, Consumer Customizes Their Viewing

Exhibit 2: “Many-to-Few” Approach, Consumer Customizes Their Viewing

Realizing half-efforts would not arrest the decline of linear networks, Disney embraced DTC in 2018. Most of the industry has followed with their own DTC applications supported by varying business models:

  • Subscription: Price points generally keyed off the $10/month level
  • Subscription + Ads: Allows for lower entry subscription price, with ad loads generally lower than linear
  • Free Ad-Supported TV (FAST): A “fast” growing alternative, especially for cost-conscious and for library content. Pluto (VIAC) was the leader here, with Peacock a FAST follower.
  • Cross-subsidization: AMZN offers a “Prime” example of offering free to content to cement the customer relationship. Disney+ may be viewed as a cornerstone to a broader “Disney-As-A-Service (DAAS).” More conventionally, several connectivity companies have offered DTC subscriptions as customer acquisition tools (e.g. VZ/Disney+).

The Great Re-Aggregation

The situation is now in a state of disequilibrium. On one hand, the consumer faces the curse of too many choices with the inconvenience of switching between apps to discover and watch content. Depending on the breadth of a household’s interest, often driven by the size and makeup of the family, a stack of DTC subscriptions can also end up more expensive than the pay-TV bundle in total, let alone on dollar per hour viewed basis.

On the other hand, the DTC model is inherently lower margin with programmers shouldering additional marketing, billing and service costs and requiring significant upfront investment in content to attract subscribers. With increased ability to suspend individual subscriptions (vs the difficulty in suspending a whole pay-TV package), a higher level of content investment may also be required by DTC providers to manage churn.

We see this driving at least two developments:

A) A renewed role for distributors to market DTC apps to consumers and/or to create new bundles of those apps. Marketing, access control and searchability (e.g. finding shows without regard to which DTC app it resides on) will continue to be important functions for those intermediaries. Two camps are likely to emerge:

  • Existing connectivity providers poised to add “smarts” to their dumb pipes: Comcast has most aggressively pursued this opportunity with its Flex and Glass TV hardware/software packages, but other cable and wireless companies retail apps such as Netflix today.
  • Platform companies including AMZN, AAPL and GOOG are in on the game as well. ROKU’s entire model today is as the organizer of content and apps as it builds its own content library.

As illustrated at right, we think DTC apps will rely variously on intermediaries. The largest, best-known apps and certain niche services with the most passionate users are most likely to connect directly with consumers while the majority of “general entertainment” apps will gain a meaningful component of their reach via distributors. 

Future Streaming Distribution Paths

B) Industry consolidation. Echoing the carriage battles of the linear area, disagreements have already erupted between the new breed of aggregators and content providers (e.g. YouTube/NBC, Roku/YouTube, Roku/HBO Max…). The need for leverage with distributors and content providers (including sports rights), the cost of marketing and the risk of wildcatting content development all underscore the importance of scale for most DTC providers. With capital’s patience for a long DTC build out limited, the most expedient avenue to scale is through confederation (partnerships to share content and user data or bundle apps) and outright consolidation. We speculation on several possibilities in our “2022 Bingo Card” below.

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Originally Posted January 31, 2022 – Beyond Cord Cutting


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