The TV industry used to be like an arch, with broadcasters, studios and sports leagues as the individual stones. The industry was strong because they stuck together. 

For thirty years or more, TV was a great business. TV companies often got paid on both ends. They got money from subscribers — particularly in the US, where the overwhelming majority of households paid for cable TV — and they got money from advertisers. Advertising was more lucrative back then because TV was about the only way to build a mass-market brand.

Then Netflix came along. TV companies looked enviously at its growth, its direct relationship with customers, and the multiple awarded to it by stock market investors. They foresaw a future where Netflix owned the customer relationship as Apple did with smartphones. And they did not like it. In the late 2010s, egged on by investors, they decided to launch their own direct-to-customer products. This was the moment when they decided to break from the rest of their peers in the TV industry and go it alone.

They had reasons to be confident. After all, Netflix had made a success of going direct to consumers. Netflix’s TV shows were no better than theirs, and often much worse. So broadcasters raced to launch a direct-to-consumer app. They invested heavily in the apps and put all their best stuff on there, often before it was broadcast on TV. 

But the TV networks failed to appreciate the danger of going it alone. The direct-to-consumer apps by HBO, Paramount and Disney have not been a hit. The technology has been surprisingly hard to build, and more importantly, it has cost a lot to acquire customers. It turns out that separately, the elements of the TV subscription bundle were worth less than the sum of its parts. 

Since May 2015, shares in ITV are down 73 per cent. Paramount, which owns NBC, is down 78 per cent. Warner Brothers Discovery is down 64 per cent. Comcast, which owns CBS and Sky but is more diversified than the rest, is flat since 2017. Disney is down 15 per cent. State broadcasters like BBC, RTÉ and Channel 4 are struggling to find their footing. 

Bundle economics

When the TV networks were focused on broadcasting, viewers had little choice but to subscribe to cable or satellite TV. The TV networks got a small amount of money from each customer. But there were a lot of customers.

Why can’t TV networks make more money by just charging customers directly? The reason a cable TV bundle is worth more than the sum of its constituent networks is to do with the concept of willingness to pay. 

When you flick on TV there are some shows you love, some you like, some you stick on in the background, and a lot they ignore. You pay one price for the whole package. 

What would happen if they weren’t all priced as one package, and you paid for each TV show á la carte? The shows would be priced to extract maximum money from their biggest fans. You might be willing to pay it for two or three TV shows. But all the TV shows you flick on when there’s nothing else on, or watch in the background, wouldn’t be worth paying for. 

It’s a bit quirky. But it comes from the fact that each TV subscriber’s tastes are different. And each subscriber would be willing to pay a lot for certain shows and a bit for other ones. 

To circle back around, this is why the TV industry was like an arch. When the networks stuck together, it was a great deal all around. Customers got all content for a reasonable price. And networks collected a small amount of money from a very large number of people.

Murdoch’s last laugh

For the last 20 years, the surprising thing about TV has been its resilience. While the rest of the media industry was getting chewed up by the internet, TV kept chugging along. It turned out to be surprisingly hard to disrupt. 

But it’s starting to happen now. The failure of the networks’ direct-to-consumer apps in the last two years is a disaster in two ways. First, the networks wasted a lot of money building and marketing them. And as Ben Thompson pointed out on the Sharp Tech podcast, by putting their best content on the apps, the networks have wrecked the value of the subscription TV bundle.

One person who saw this coming was Rupert Murdoch. In 2017 he sold 21st Century Fox, which makes TV shows and movies, to Disney for the excellent price of $71.3 billion. Then the following year he sold his 39 per cent stake in BSkyB to Comcast for $39 billion — $36 billion more than it was worth, according to an analyst in 2020.

Murdoch was betting that the networks would try to go direct to consumer and that they would fail. At the time, it was thought broadcasters would need a library full of great intellectual property to get people to subscribe. Hence Disney’s purchase of 21st Century Fox.

Murdoch was also betting that, when broadcasters went direct to consumer, the existing subscription bundlers would be collateral damage. BSkyB, the parent company of Sky, is of course Europe’s biggest subscription bundler.

Since the deal, Sky has floundered. The following chart shows its adjusted Ebitda in the fourth quarter of each year. The deal went through in the third quarter of 2018. In the same period of time, the total number of customers has declined slightly, by two per cent.

As a customer, I notice Sky's pricing power slipping away. Previously Sky was expensive and it came with a big commitment. One had to sign up for a year at €75 per month. But now you can sign up for a one-month contract to catch the knockout games at the end of the season, or to binge on Succession, or €30.

We're left with a world where broadcasters are weak and divided. Subscription TV bundlers like Sky have little to fill their channels with. All that's left is live sports.

If I were the Premier League I would be worried. They are the anchor tenant of the Sky subscription bundle. The value of the Sky subscription had been enhanced by everything else that went in there. Now, with the broadcasters trying to make it on their own, the Premier League is left behind. The only tenant in the shopping centre.

Declaration of interest: The Currency’s Editor Ian Kehoe is Deputy chair of RTÉ’s board. He did not edit this article.