How Legacy TV Can Compete With Big Tech's Premium Video Services

Amazon makes a lot of money selling to Prime subscribers and giving them free shipping. It also makes a lot of money selling merchant services to ecommerce companies, and an awful lot of money selling AWS cloud storage services. And it gives away unlimited access to billions of dollars of great movies, series and sports content.

Apple makes a lot of money selling iPhones, iPads and iMacs. It also makes a lot of money taking a piece of the revenue for many of the apps running on its products. And now, every time you buy a new Apple device, your household gets Apple TV+ streaming services for free, which include billions of dollars of great movies, series and sports content.

Ten years ago, a good friend and top investment banker told me that once premium video streaming services were given away en masse as free “premiums” for buying other products or services from big tech companies, the days would be numbered for television and movie companies as we know them. Premium video services, she feared, would become commoditized, like the free toasters that used to be given away when customers opened a banking account.

Her perspective was that those movie and TV companies’ business models were built around the analog media world, where distribution was scarce but attention was plentiful. Broadcast, satellite or cable carriage were monopoly providers of video into consumers’ homes. Putting content on those channels guaranteed big audiences hungry for quality video programming, with big cuts for subscription fees and ad revenue plentiful as a result.

In a digital media world, distribution is no longer scarce. Anyone can deliver a video stream into an Internet household, and many thousands of companies currently do. With so much choice, viewer attention is now scarce. Streaming viewing is fragmented over hundreds of thousands of videos at any given time. No longer will making great video create a profitable revenue stream on its own.

This point really hit home for me when I read a recent Sports Business Journal piece co-authored by my good friend John Kosner, the longtime head of digital and strategy at ESPN, about the extraordinary disruptive power that Amazon now represents to the world of sports media. Its Thursday Night Football streamcast is attracting 15 million to 20 million viewers per week (with much younger audiences than the NFL normally attracts) and has spiced up production with tons of cool camera angles and stats. Most importantly, the football streamcast is apparently generating many new Prime subscriptions each week as well.

Is it possible for legacy TV/video companies to survive that kind of world without similar adjacent market subsidies? It will be hard, but these three issues will be critical:

Win where subsidized streamers aren’t. Legacy video companies need to maximize their revenue from legacy channels like broadcast, cable and satellite. Those channels support hundreds of millions of viewers in the U.S. each day. They're not going away soon; they should be with us for at least another decade.

Cooperate to eliminate costs. Revenues will be hard to sustain, so cost-cutting will have to move faster. Most legacy video companies have a lot of duplicative vertical integration -- they each have their own ad sales, marketing, operations, production teams, etc. They will need to create or participate in cross-company service bureaus to take out these costs and reduce them dramatically for all cooperators. Possibly 50% of a national TV company’s operating costs could be eliminated that way.

Build your own adjacent market subsidies. What’s good for the goose is good for the gander. Offering free premium video gives mobile phone and ecommerce companies attractive consumer acquisition economics. Do exclusive deals with their competitors -- or companies like them in categories like financial services or retail -- to build the same kinds of advantages for yourself, just going the other direction.

This won’t be easy for the culture of legacy TV video companies. But those that can execute it well will reap big rewards.

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An earlier version of this blog was originally published by MediaPost.