Netfilx headquarters in Los Gatos, California. Photo / AP
Netfilx headquarters in Los Gatos, California. Photo / AP
What is the future of television? Will television experience a similar dramatic downturn in revenue as the newspaper, music and book retailing sectors?
Television's future is in the spotlight following the publication of Alan Wolk's book "Over the Top: How the internet is (slowly but surely) changing the television industry" and the release of Television New Zealand's 2015 annual report.
Wolk, a high profile US television industry commentator, believes that it "is the last of the twentieth-century mass media to be disrupted by the twenty-first century internet. It's also going to prove to be the toughest. The American television industry is still a cash machine that's protected by an intricate web of rights, deals and inertia. But that's changing and rapidly. And when it does, it's going to change the industry dramatically."
The internet has already had a dramatic impact on the newspaper, music and book retailing industries.
Annual US newspaper revenue has plunged from US$46.1 billion to $19.9 billion since 2003 while global music industry revenue has declined from US$22.5 billion to $15.0 billion over the same period.
Wolk argues that two developments killed the music industry. The first was piracy, in the form of Napster and other services that people used to download entire libraries of music. The second was the death of the album which, according to Wolk, was at the hands of Apple.
Amazon and the internet have had a massive impact on book retailing with online vendors generating sales of US$5.9 billion in the United States in 2014 compared with $3.8 billion by physical stores.
Wolk argues that television has remained relatively immune to change because it has had 'to accommodate the lowest common denominator and much of the audience is still not particularly tech savvy". In other words, a large number of households are still dominated by the traditional TV set in the main living area.
United States surveys show that viewers now watch up to 50 per cent of television programmes when they want to, rather than at the networks' predetermined time.
However, he argues that a revolution is under way as 40 million US homes have Netflix, which could have the same impact on traditional television as Napster and LimeWire had on the music industry.
Netflix delivers a service known as Subscription Video on Demand (SVOD).
In the past viewers had to watch programmes according to the networks' preordained timetables.
Reed Hasting, CEO and founder of Netflix, right, is flanked by Tawni Cruz and Ted Sarandos, Netflix chief content officers. Forty million homes now have Netflix. Photo / AP
However Netflix and other streaming services allow viewers to watch programmes when they want to on many different devices. United States surveys show that viewers now watch up to 50 per cent of television programmes when they want to, rather than at the networks' predetermined time. This development, which is called time-shifting, reduces television's advertising revenue because viewers have more opportunities to avoid ads.
Ironically, Netflix and other subscription services are enabling the younger generation to watch television without commercials when the bulk of their offering consists of TV series that were originally funded by advertising revenue.
Wolk writes; "Nothing has proven quite as disruptive to the industry as the trend towards time shifting. In addition to quantifiable changes - plummeting live viewership numbers and decreasing revenue - there is a psychological shift too, as viewers are now the ones in control".
He makes a number of predictions including;
• TV will be available on more and more devices which will gradually replace the traditional living room television set.
• TV will become more personalised, with Netflix - and other streaming services. copying Amazon by offering programmes to viewers that are comparable with their previous orders.
• More and more television will become available through SVOD and other streaming services.
• TV will become increasingly fragmented and have to compete with non-traditional outlets. For example, Wolk writes about 21 year old Cameron Dallas who appears in short videos - often shirtless - which are predominantly watched by young teenaged girls.
Wolk writes that Dallas has 2.1 million Facebook followers, 3.6 million on YouTube, 4.8 million on Twitter and 6.4 million on Instagram and 7.6 million on Vine.
• Binge watching, where viewers watch one episode of a series after another, will continue to be popular.
Nielsen figures show that US television viewing continues to decline. In the December 2014 quarter overall viewing declined by 4.6 per cent year-on-year, there was a 16 per cent contraction in 18 to 24 year old viewership and a 10 per cent decline for the 12 to 17 year age group.
Nielsen reports that 18 to 24 year old Americans now watch an average of 16.5 hours of television a week compared with nearly 24.5 hours a week four years ago. The younger age group is spending more and more time on streaming services.
The recently released Television New Zealand annual report for the June 2015 year had numerous comments on the dramatic changes in the TV sector.
Chair Joan Withers wrote; "TVNZ successfully strengthened its share of TV advertising revenue, however this and a 19 per cent increase in online revenue wasn't enough to fully offset softer overall market demand for TV advertising. Total revenue declined 2.9 per cent year-on-year to $350 million with total advertising revenue down 1.9 per cent".
Withers went on to say; "Looking at TVNZ's free-to-air television business, the number of people using TV is slowly declining in favour of digital options. This is something that TVNZ is embracing as opposed to resisting, hence the significant investment this financial year in rebuilding TVNZ OnDemand and One News Now online services".
Chief Executive Kevin Kenrick confirmed that "audiences are fragmenting across multiple platforms" but TVNZ is "increasingly agnostic about how people view our content". He wrote that "online news is all about immediacy and One News Now is focused on meeting this viewer need by delivering short duration video news streams primarily to mobile devices".
He concluded that "TVNZ is making encouraging progress in its transformation from being a traditional TV broadcaster to becoming a contemporary rich media content service provider".
Over half of New Zealand homes already have Sky, but this hasn't stopped them from adding Netflix to the Pay TV mix - the rate of Netflix uptake among households with Sky has been virtually identical to the national norm of just under 1 in 10.
TVNZ's performance is encouraging and there are clear sighs that it has far more momentum than TV3 at present.
Television New Zealand is fortunate to have a strong Withers/Kenrick leadership team but it has major challenges ahead.
The threat to TVNZ was made clear during the week when Roy Morgan Research revealed that 398,000 New Zealanders, or 9.4 per cent of the population aged 14 and above, now have access to Netflix.
The report stated that "as has been the case around the world, including Australia, New Zealand's uptake of Netflix has been swift. These results, compiled over the first three months since Netflix landed, show that almost 400,000 Kiwis already have access across 164,000 household subscriptions."
"Over half of New Zealand homes already have Sky, but this hasn't stopped them from adding Netflix to the Pay TV mix - the rate of Netflix uptake among households with Sky has been virtually identical to the national norm of just under 1 in 10."
The Roy Morgan report revealed that the strongest Netflix uptake has been in the young couples, young parents and young singles households. The slowest uptake has been in the mid-life and older householders.
Netflix is also on fire in Australia with Roy Morgan reporting that 2,630,000 Australians 14+ now live in homes with a Netflix connection compared with only 748,000 five months ago.
Traditional television companies are facing huge challenges, particularly from SVOD, while viewers will be offered more and more exciting opportunities in the years ahead.
It will be fascinating to see how the state-owned Television New Zealand copes with these massive industry changes.
Brian Gaynor is an Executive Director of Milford Asset Management, which holds Sky Network Television shares on behalf of clients.
