The Impact of Technology on the Entertainment Distribution ...

Claremont CollegesScholarship @ Claremont

Scripps Senior Theses Scripps Student Scholarship

2016

The Impact of Technology on the EntertainmentDistribution Market: The Effects of Netflix andHulu on Cable RevenueNicole P. AliloupourScripps College

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Recommended CitationAliloupour, Nicole P., "The Impact of Technology on the Entertainment Distribution Market: The Effects of Netflix and Hulu on CableRevenue" (2016). Scripps Senior Theses. Paper 746.http://scholarship.claremont.edu/scripps_theses/746

THEIMPACTOFTECHNOLOGYONTHEENTERTAINMENTDISTRIBUTIONMARKET:THEEFFECTSOFNETFLIXANDHULUONCABLEREVENUE

by

NICOLEALILOUPOUR

SUBMITTEDTOSCRIPPSCOLLEGEINPARTIALFULFILLMENTOFTHEDEGREEOFTHEBACHELOROFARTS

PROFESSORSEANFLYNNPROFESSORROBERTOPEDACE

DECEMBER11,2015

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Abstract

Online streaming has revolutionized the way that people consume

filmsandtelevision.ThisstudywillexaminehowNetflixandHuluhave

disrupted the North American distribution oligopoly and asses

whether their low subscription prices are adversely affecting major

cable companies who dominate the distribution sphere. A review of

existingliteratureonthetopicwillexploretheinfluenceoftheInternet

ontheentertainmentdistributionoligopolyaswellasconsumertrends

andbehaviorfavoringNetflixandHulu.Additionally,datafrom2007to

2014 will be used to analyze variables that indicate a correlation

between Netflix’s and Hulu’s growth and Time Warner Cable’s

decreasingrevenue.

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TableofContents

Introduction..................................................................................................................................................4

RelatedLiterature......................................................................................................................................5

TheEntertainmentMarketOligopoly...............................................................................................6

Technology’seffectonthelongstandingoligopoly...................................................................10

ConsumerInfluence................................................................................................................................12

NewerPlayersintheDistributionMarket....................................................................................13

ShortcomingsoftheLiterature..........................................................................................................14

DataandVariables...................................................................................................................................17

Conclusion...................................................................................................................................................25

References...................................................................................................................................................29

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Introduction

Rapidtechnologicalinnovationsoverthepast10yearshavedisrupted

entertainmentdistributioninawaythathasbeenunprecedented.Aspersonal

computers,laptops,tablets,andsmartphoneshavebecomecommonhousehold

goods,emergingcompanieshaveembracedtechnologicaladvancementsand

incorporatedthemintotheirbusinessmodelstocreatearevolutioninthewaythat

audiencesconsumeentertainment.NewfirmssuchasNetflixandHuluhavegrown

throughtheuseoftheInternetasaplatformtodistributefilmsandtelevisionseries,

cuttingcostssuchasphysicalinventory,set-topboxes,remotecontrols,and

modems.Nevertheless,theyareabletooffercustomersalargevarietyofshowsand

moviesthatsatisfybothpopularandnichedemands.

Thesenewercompaniesbringawiderassortmentoftelevisionandvideo

contenttoconsumerswhopreviouslywerehardertoaccess.Ratherthandelivering

abundlepackageofgenerictelevisionstationsoronlyofferingbigcommercial

contentatahighprice,theyhavealibrarythatalsocontainsindependentfilmsand

productionsthatnevermadeittotheatersorlargerrentalservices.Thelarger

supplyofvideocontentandlowercostsassociatedwithdistributionallowformore

competitivepricingamongthenewercompaniesthataredisruptingtheoldfilmand

televisionoligopoly.IfNetflixandHuluareabletoentertheoligopolyanddecrease

pricessignificantly,howdoesthateffectcablefirmsincludingTimeWarnerCable

whohaven’tadjustedpricesaccordingly?

Inthisthesis,IanalyzeNetflixandHulutounderstandhowtechnologyhas

openedthedoorforsmallerfirmstoenterthisoligopoly;furthermore,anoverall

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declineinTimeWarnerCable’srevenueindicatesthatlow,competitivesubscription

pricessetbyNetflixandHuluareadverselyaffectingcablefirms’abilitytocompete.

Ilookattechnologicalshiftsthathaveoccurredoverthepastsevenyears,howthese

companieshaveincorporatedthemduringthesespecificperiods,andpatternsin

pricesandrevenuethroughoutthistimeline.Examinationofvariablespertinentto

bothconsumersaswellasNetflix,Hulu,andTimeWarnerCablewilldevelopa

biggerpictureofhowthesupplyanddemandforentertainmenthasshiftedand

affectedcablerevenue.

RelatedLiterature

Technologicalinnovationoverthepasttenyears,especiallythrougheasy

accessandthecommercializationoftheInternet,hasrevolutionizedfilmand

televisiondistribution.Theever-changingnatureoftechnologyandconsumer

behaviorhaspromptedrapidchangesindistributionmethodsfromyeartoyear,

makingthisanintriguingtopicofresearchwithineconomic,business,legal,and

mediasectors.TomEvens(2014)dissectstheclashoftelevisionplatforms,drawing

macroeconomicandmicroeconomicanalysesoftherolethattechnologyhasin

disruptingorshiftingthemarket.CamilleJohnson(2014)usesalegallensto

examinehowthecurrentdistributionoligopoly,threatenedbyemergingconsumer

trendssupportingonlinedistribution,mayneedgovernmentinterventiontokeep

mediaconglomeratesfromusingrestrictivepracticesthatblocknewcompanies

fromemerging.Additionally,AlejandroPardo(2013)focusesonHollywood’s

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distributionrenaissanceandhowexistingbusinessmodelsmustadaptto

technologicalchangesinordertoremaincompetitive.

TheEntertainmentMarketOligopoly

Ineconomics,anoligopolyisamarketstructureorindustrythatisheavily

influencedanddominatedbyafewlargefirms.Thesmallconcentrationof

companieswithinoligopoliesresultsfrombarrierstoentry,suchashighcosts,that

keepnewerandsmallerfirmsfrompartakinginthemarket.Thegoodsthatthese

profit-maximizingcompaniesproducearealmostexactlythesame,whichiswhy

firmsareconstantlycompetingtodominatelargesharesofthemarket.Asaresult,

theyareinterdependentononeanother,keepingsimilarpricestostaycompetitive.

Oligopolisticfirmstendtohavecontroloversupply,givingthemsignificant

influenceoverprices.Nevertheless,pricingtendstobeconsistentamongallfirms

becausetheyrisklosingrevenueandmarketsharestocompetitorsiftheyraisethe

pricesoftheirgoods.Conversely,iftheydecidetolowerpricesoftheirgoods,other

firmswillhavetodothesametoremaincompetitive.

Massdistributionofentertainmentcontenttendstobedonethroughcable

andsatellitetelevision,asthisisthemostcommonmodeforpeopletoconsume

televisionandfilms.Bloombergreportsindustryleadersandtheirmarketsharesin

thecableandsatelliteindustry,indicatingthattherearetenmajorfirmsinthe

NorthAmericasectorcomprisedofthefollowingcompanies:Comcast,DirectTV,

TimeWarnerCable,DISHNetwork,CharterCommunications,CablevisionSystems,

EchoStar,ShawCommunications,BCEInc.,andRogersCommunication.Ofthese

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companies,BloombergspecifiesthatComcasthasthehighestsalesfollowedby

DirectTV,TimeWarnerCable,andDISHNetwork.Comcasthasamarketshareof

26.7%,DirectTV’smarketshareis20.5%,TimeWarnerCablehasashareof

14.20%,andDISH’sshareis9%(Bloomberg2015).Thesefourcompaniestogether

hold70.4%ofindustryshares,andthesixothercompaniescombinedhaveamere

29.6%(Bloomberg2015).A$202.5billionindustrycontrolledandrunbya

relativelysmallnumberoffirmsisastrongindicationofanoligopoly.

Evensanalyzestheentertainmentdistributionmarketthrough

characteristicsincludingindustryconcentration,numberofbuyersandsuppliers,

entrybarriers,andtechnologicalchangestoevaluateitsoligopolisticnature.

Economiesofscaleareprevalentincableandsatellitedistributionmarketswithin

theentertainmentindustry.Americanentertainmentandleisureconsistslargelyof

filmandtelevisionconsumption,whichiswhythemajorityofhouseholdstendto

purchasetheseservices.Highdemandforentertainmentprogramsmeansthat

companiesinthisindustrycanproducetheir“goods”atalargerscaleanddecrease

inputcosts.Furthermore,consolidationisasignificantcharacteristicinmedia

distributionasameansofmaximizingefficiencyinthiseconomicsetup.

Mergers,acquisitions,andverticalintegrationincreasethesefirms’

competitivepositionsandbargainingpowersignificantly,whichhasledtoa

tendencyofoligopolisticcontrol(Evens2014).TosupportEven’sobservations

aboutindustryconsolidation,onecanlookatthenumberoneleaderincable

distribution.Comcastisamajorconglomeratewhoseservicesextendbeyond

providingcabletelevision,Internet,andphoneservices.ItboughtNBCUniversal,

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anothermajorconglomeratethatownsstudios,themeparks,broadcastnetworks,

andcablechannels.Additionally,TimeWarnerCablehasthesecondhighestmarket

shareincabledistribution.Alongwithitsfunctionasacablecompany,TimeWarner

Cable’sassetsincludeHBO,WarnerBrothers,CartoonNetwork,CNN,NewLine

Cinema,andmore.Comcast’sownershipofNBCUniversal’scontentandTime

WarnerCable’sownershipofWarnerBrothersandotherassetshaveclear

advantagesbecausetheycontroltheirownsupplychain.Withtheownershipof

contentcreators,theycangenerateandnegotiatefavorabledealsfortheircore

businesseswhileincreasingcontentpricesforcompetitors.

Filmandtelevisiondistributors’consolidationhascreatedanindustrywith

lesscompetitionandmuchmorebargainingpower.Inthemarketstructure,thereis

alargergroupofbroadcastersandasmallnumberofmajordistributors.The

numberofcompetitorsindistributionisamajorindicatoroftheoligopolyand

pointstothedifficultythatsmallercompetitorshave:“Thestrengthofafirm’s

competitivepositionultimatelydependsonthepresenceofsubstitutes,andthe

abilityofsuppliers(orbuyers)tobypasspowerfulpartiestobargainbetter

commercialterms”(Evens2014).Evenssuggeststhatpooledbargainingor

collectiveactionmaybeausefulstrategyforsmallerornewercompaniestohave

morebargainingpowerwhencompetingagainstconsolidatedorvertically

integratedconglomerates.Johnsonclaimsthatalternatively,smallercompanieswho

arenotpartoftheverticallyintegratedsystemhaveahardtimecompetingandare

typicallyforcedtointegratethroughunfavorablearrangementswiththebigger

videoprogrammingdistributors”(Johnson2014).

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Barrierstoentry,includinghighentrycosts,havehistoricallyprotected

majorentertainmentcompaniesfromcompetitiveentry,reinforcingbargaining

powerintelevisionmarketsaswell(Evens2014).Inparticular,thesepricesinclude

contentandphysicalcapital.Televisiondistributionhastypicallybeendonethrough

cableandsatellite,asconsumersareabletowatchprogramsontheirTVsthrough

cableboxesandsatellitedishessetupintheirhouseholds.Thepriceofcontentis

high,especiallyfornewerfirmswhodon’thaveestablishedrelationshipswith

contentcreators.Asmentionedbefore,ComcastandTimeWarnerCableown

contentsupplyandcanobtainfavorabledealsforthem.Whatimpactdoesthishave

onemergingfirms?ComcastandTimeWarnerCablecanengageinanticompetitive

behaviorthatlimitsthecontentthatNBCUniversal,WarnerBrothers,etc.are

willingtoselltothesenewerfirmsormaytrytoblockthemoutcompletelyby

signingexclusivedeals.Additionally,theymaypricethecontentatan

astronomicallyhighcostthatnewerandsmallerfirmswon’tbeabletopay.This

strengthenspowerdynamicsamongoligopolisticcompaniesandkeepstheindustry

concentrationsmall.

Thesecondentrycostthatisdetrimentalfornewercompaniesisthepriceof

physicalequipmenttheymustinvestin(Johnson2014).2014Bloombergreports

projectthegrowthrateinsalesrevenueforComcasttoincrease7.7%in2015and

TimeWarnerCabletogrow3.43%(Bloomberg2015).Withthisamountofgrowth

forsuchlargecompanies,thesetwofirmshavethemeanstocontinuemass

investmentoncapitalandequipmentsuchascableboxes.Smallerfirmslookingto

enter,however,wouldhavetoputdownamassiveinvestmentforequipmentthat

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theycan’tguaranteewillbesold.Havinginadequateinitialfundsforinvestmentand

aweakclientbase,newfirmsmayfacechallengesbreakingintothecableindustry

orstayingafloat.Theabsenceofpublicindustrydataindicatinghowmuchcable

companiesarepayingfortheproductionofcableboxes,machinery,rawmaterial,

makesithardtodeterminethepricenewfirmswouldhavetoinvestinorderto

manufacturecableboxes.Itisunrealistictoassumethatanemergingfirmwouldbe

heldincomparisontoComcastorTimeWarnerCable,butthecompanywouldat

leastneedtobecomparabletoRogersCommunicationinordertoenterandremain

competitiveintheoligopoly.Bloomberg’sindustrydataindicatesthatRogers

Communicationhasthesmallestmarketshareintheindustrywithatotalof2.02

millionNorthAmericansubscribers.TobeonanequalplayingfieldasRogers

Communication,anemergingfirmneedstobepreparedtoserviceasimilaramount

ofcustomers;moreover,itwouldmostlikelyhavetoinvestintheproductionof

about2.02millioncableboxes.Thismassiveinvestmentmaybeparticularlyrisky

forsmallerfirmswhoareunsureiftheywillmakeitintheindustry.Highentrycosts

aswellasverticallyintegratedcorporations’exclusiveaccesstocontenthave

limitedthenumberoffirmsthatcanenter,compete,andsurviveinthedistribution

realm.

Technology’seffectonthelongstandingoligopoly

Technologicalinnovationhasbeenamajorfactorthatcanpotentiallydisrupt

competitionandthestatusquooftheindustry’sstructure.Evensclaims,“New

technologyerodesentrybarriersandchallengesoligopolycontroloverbottlenecks

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thatgiverisetogatekeepingpower”(Evens2014).Pardoechoesthissentimentthat

technologysuchastheInternethasbeenerasingbordersandshiftingparadigmsof

televisiondistributionthatwereoncedefinedandcontrolledbythesemajorfirms.

PardoexplainsthatHollywoodiscurrentlyatadigitalcrossroadcharacterizedby

twocentralmovements:“Ononehand,theemergenceofanewmarketforthe

commercializationofaudiovisualproducts(Internet,digitalreproductiondevices,

smartphones,smartTVs)…and,ontheother,theemergenceofanewtypeof

consumer,knowncollectivelyas‘theiPod-‘or‘theNet-generation’(Tapscott2009)”

(Pardo2013).Becauseoftheabundanceofconsumerswhohaveaccesstothe

InternetanddevicesthatconnecttotheInternet,companiessuchasNetflixand

Huludidnotneedtoinvestinsuchhighentrycosts,capital,andlaborfortheir

streamingservices;moreover,theirbusinessesrelyonInternetaccessinorderto

function,avoidingtheneedtopurchase,manufacture,andinstallcableboxesor

satellitedishes.

Withloweredinitialbarriers,thereispotentialformorecompetitionamong

distributors.WhileEvensarguesthatentrybarriershavedecreasedinthefaceof

digitalabundance,hebelievesthattheyarestilllikelytopersistbecauseofthe

presenceofeconomiesofscale(Evens2014).Nevertheless,heclaims:“Digital

technologynotonlyincreasesefficiencyinthesupplychain,butalsotendstoshift

bargainingpowertothosepartiesthatadaptquicklyinordertoreapthefruitsfrom

thenewdigitalopportunities”(Evens2014).Newercompaniesinthedistribution

realm,particularlyNetflixandHulu,havebuilttheircompanymodelsinwaysthat

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mirrorandquicklyadapttotechnologicalinnovations,forcingestablishedfirmsto

keepup.

ConsumerInfluence

Consumershaveavitalroleinthechangingdistributionmarket.While

JohnsonandPardorefertochangingtelevisionaudiencesbydifferentnames,they

bothagreethattechnologyhashadasignificantimpactonthewaythataudiences

consumeandwatchtelevision.Johnsonreferstotwodifferenttypesofemerging

consumerswhoarethreateningthetraditionaldistributionmodel.Shedescribes

“cordnevers”asagroupof“techsavvy‘20-somethings’”whohaveneversubscribed

totraditionalmultichannelvideoprogramming,optingforInternetstreaming

optionsinstead.Cordcuttersareconsumerswhopreviouslypaidforcableor

satellitetelevision,buthavedecidedtostopsubscribing.Likethecordnevers,they

havechosentoaccesstelevisionandprogramsthroughtheInternetinstead

(Johnson2014).Ratherthanexaminingemergingaudiencesbasedontheir

televisionviewinghabits,Pardolookstotheirabilitytokeepupwithtechnological

devicestodeterminetheirbehavior.Heframesthedigitizationofentertainment

with“therapidexpansionofthe‘Appleecosystem’”(Pardo2013).Since2001,Apple

hassucceededinsellingover140millioniPods,promptingequallysuccessfulsales

ofiPad,iPhones,andotherdevices(Pardo2013).Additionally,Apple

commercializedmorethan3millionmoviesaswellas100millionepisodesof

televisionshowssinceOctober2005(Pardo2013).Thisinnovationhasshiftedthe

waythatconsumersinteractwithtechnology:“This‘iPod/iPhone/iPadgeneration’

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epitomizesthenewpeergroupofuserswhoseaudiovisualexperienceisbasedon

allsortsofmediaplatformsandwhoseprofiletoalargeextentmirrorsthatofthe

cinema-goingpublicandthosewhoplayvideogames”(Pardo2013).AstheInternet

isreadilyavailabletoconsumersandsmartdevicesarecommonhouseholditems,

thesenewtechnologicallydrivenusersinteractwithentertainmentinamore

efficientway.Marketingexpertshavededucedthatnumericallythisgenerationof

usershasreachedacriticalmass,andtheirconsumerpracticescontrastthoseof

previousgenerations(Pardo2013).Withtheprevalenceofcordcutters,cord

nevers,andagenerationofAppleusers,JohnsonandPardoviewchangesin

distributionasaresponsetogrowingdemandfordigitalplatformsforonline

televisionviewing.

NewerPlayersintheDistributionMarket

Currently,theleadersofonlinecontentdistributionincludeNetflixandHulu.

Netflix,establishedin1999,hasevolvedfromamailorderDVDrentalcompanyto

anonlinestreamingservice(Johnson2014).CompetingwithBlockbuster,itallowed

consumerstoconvenientlyrentmoviesfromthecomfortoftheirownhome

throughtheInternet.By2007,Netflixrevolutionizeddistributionbyemployinga

WatchInstantlyfeaturethatallowsaudiencestoplayselectmoviesandshows

immediatelyontheircomputers.Theironlinestreamingfeaturehaselevatedtheir

businesssignificantlyandhasbecometheirmajorsourceofrevenue,servingmore

than40millionsubscribers(Johnson2014).Forafixedsubscriptionpriceof$7.99

permonth,consumerscanhaveaccesstounlimitedonlinestreamingaswellasDVD

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rentals.Withrapidsuccessandgrowthoverarelativelyshorttimespan,the

companyhasbegunproducingitsownoriginalcontentincluding“HouseofCards”

and“OrangeistheNewBlack”.ThesuccessofNetflixandonlinestreaminghasbeen

metbycompetition.In2008Huluemergedintotheonlinedistributionmarket.

SimilarlytoNetflix,Hulustreamstelevisionandfilmsthroughanonlineplatform

andoffersasubscriptionforHuluPlusatthesamepriceof$7.99permonth.

CurrentlyownedbymajortelevisionconglomeratesincludingComcast,21stCentury

FoxCorporation,andtheWaltDisneyCompany,itistheprincipaldigitaldistributor

ofnetworktelevision(Johnson2014).

ShortcomingsintheLiterature

Johnsonexaminestheemergenceofonline-baseddistributorsthroughtheir

abilitytoactasdirectcompetitorsoftraditionalmultichannelvideoprogramming

distributors,or“MVPD”s.Inthissense,shefocusesontheideaofvirtualcable

companieswhocanprovidethesamechannelsandcontentastraditionalcable

companies.Bydoingso,shearguesthatMVPDshavemadeitimpossibleforthese

virtualcablecompaniestoexistbecauseofanticompetitivebehaviorsuchasillegal

dealswithcontentprogrammersthatpreventothersfromaccessingcontentor

manipulationofpricestodiscourageMVPDsubscribersfromcancelling.Whilethis

isavalidpoint,thisthesisemphasizestheinfluencethatinnovationhasonchanging

themarketasawholeandfindsanemphasisontheideaofanonlinecablecompany

tobesomewhatlimitinginresearchinganddeterminingtheeffectsthatonline

distributionhasontheexistingmarketandcablecompanies.Johnson’sfocusonthe

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inabilityofvirtualcablecompaniestoemergedoesn’tfullytaketheideaofshifting

consumerpatternsandpreferencesintoaccount.

Onlineplatformsdon’tnecessarilyneedtoprovideidenticalservicesascable

andsatellitecompaniesinordertobesuccessful,asEvensechoes.Duringtimesof

digitizationandtechnologicaladvancement,thereisgreatopportunityfor

innovationtobemorefruitfulthanreplication.Anexamplesupportingthispointis

thephysicalDVDrentalbusiness.Inthefollowinganalogy,Blockbustercanbe

equatedtocableandsatellitetelevisioncompanies,andNetflix’soriginalbusiness

modelofonlinerentalofphysicalDVDscanbeequatedtoonlinecablecompanies

thatJohnsonmentions.WhileNetflixputBlockbusteroutofbusinessbecauseit

offeredthesameserviceinamoreconvenientway,Netflix’soldbusinessofDVD

rentalsneededtogoastepfurtherintostreamingtofullysatisfyconsumertrends.

Thisinstanceofinnovationshowsthatperfectsubstitutes,orreplication,suchas

onlinephysicalrentalservicesmaynotbeaseffectiveasanalternateformof

competitionthatrespondstoconsumerneeds.Streamingisanalternativetorenting

films,whichhasbecomeamorepopularchoiceinthepastfewyears;moreover,

streamingandonlinedistributionofcontentdonotnecessarilyneedtofollowcable

andsatellitetelevisionmodelsinordertodowellinthemarket.Onemayarguethat

cableandsatelliteoffermorechannelsandcommercializedcontentthatothersmay

nothaveaccessto,butitisimportanttonotethatNetflixandHuluofferawide

selectionofpopularprogrammingfrommajormediacompaniessuchasNBC

UniversalandABCTelevisionaswellasindiefilms,nichecontentoftenoverlooked

bycablecompanies,andoriginalcontent.Atasignificantlylowerpricepointfor

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unlimitedaccesstothousandsoftitles,thesedigitaldistributorshavebeenmajor

contributorstothecordneverandcordcutterphenomenon.

Additionally,literatureontheinfluenceofNetflixandHuluoncable

companieshasyettodefineorexamineaclearrelationshipbetweenthenewer

companies’growthandtheeffectsthattheyarehavingoncableandsatellite

companies.WhileNetflixandHuluwereabletousetechnologytobreakintothe

distributionindustryandcompetewiththeseMVPD,whatexactlyistheimpactthat

theyarehavingonthemajorcableandsatelliteconglomerates?Towhatextenthave

theydisruptedtheoligopolyandwheredotheystandinthemarket?Asmentioned

earlier,inanoligopolisticindustry,conglomeratesareforcedtorespondtoprice

changesamongrivalstoremaincompetitive.Hulu’sandNetflix’spricesare$7.99,so

howisthisimpactingcablecompanieswhosepricesremainabouteighttimes

higher?Whatkindofvariablesanddataarehelpfulinassessingtheimpact?The

followingdatasectionsanddataanalysiswillexamineaspectsofdistribution

includingconsumerhabitsandtrends,prices,andrevenuetoobservearelationship

thatcanaddressexistingquestionsandholesinthestudy.

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Dataandvariables

Intheliteraturereview,theauthorscharacterizedcertainsubsetsof

consumersasbeingcordcutters,cordnevers,andtheAppleGeneration.Figure1

uses2015datafromDeloittetoshowthedifferentagegroupsoftelevision

consumers,indicatingthepercentageofeachagegroupthatstreamsmonthly.Data

revealsthatamongyoungertelevisionviewers,thereisahigherpercentageof

individualswhostreammonthly.Theoldertheaudiencemembersare,thesmaller

thepercentageofpeopleintheiragegroupswhostreamtelevisionmonthly.This

makessenseintuitivelybecauseyoungergenerationstendtoadapttonewer

technologyatafasterrateandhaveaneasiertimechangingtheirhabits

accordingly.A14-yearoldcordneverwillhaveasmoothertransitionfollowing

distributiontrendsthana40-yearoldconsumerwhohasbeenwatchingcable

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televisionfordecades.Whilethetrendinthedatashowsapatternofdecreasing

percentagesofstreamersasconsumersgetolder,thereisanoticeablysharper

decreasebetweenthosewhoare32-48yearsoldandconsumerswhoare68and

older.However,thereisonlya12%differencebetweenthepercentageof14to48

yearoldswhostreammonthly.Accordingtothedata72%of14-25year-old

televisionviewersutilizeonlinestreamingcomparedtothe23%ofpeople68and

older.Overall,53%ofconsumersofallagesstreamtelevisionprogramsmonthly,

indicatingthatstreamingonaveragehasbeenembracedbymorethanhalfof

individualsinallagegroups.

Asmentionedearlier,Netflix’sandHulu’sonlinedistributionservices

emergedaround2007,rivalingmoreestablisheddistributorssuchasComcastand

TimeWarnerCable.Thesecompaniesarerelativelynew,whichiswhytheiryearly

revenueisanimportantfactorinunderstandingtheirexpansionintothismarket.

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Ratherthanlookingattheirrevenueincomparisontothoseofthemajorcableand

satellitecompanies,itisbettertoanalyzeindividualchangesinrevenuefromyear

toyeartodeterminehowquicklythecompaniesaregrowing.Hulu’sfinancial

informationisnoteasilyaccessible,sotherevenueIobtainedcomesfromStatista.

Statista’sresearchanalystscollecttheirdatathroughresourceswithintheindustry.

IalsolookedintoNetflix’sannual10-Kfinancialreportsfrom2007to2014to

collectitsrevenue.Overall,therevenueforbothcompaniespointstoasignificant

yearlygrowthrate,whichisdepictedinFigure2.DatasuggeststhatNetflix’s

revenuehasincreased4.57timesoverthespanofsevenyearsfrom$1,205,340,000

to$5,504,656.Hulu’srevenuein2013is50timeshigherthanitsrevenuein2007,

increasingfrom$20,000,000to$1,000,000,000.Thesegrowthratesindicate

significantmomentuminthecurrentonlinedistributionmarket.

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In2014,approximately87%ofU.S.householdssubscribedtoeithercableor

satellitetelevision(Experian2014).Physicaltelevisionsaretypicallygood

indicatorsofsatelliteorcableuse,sothenumberoftelevisionhouseholdsintheU.S.

cansupportthisstatisticandillustratetheprevalenceoftheseformsofdistribution

overthepastdecadeorso.CollectedonStatista,Figure3showsthisdatafrom2000

to2016.Thenumberoftelevisionhouseholdsdramaticallyincreasedfromtheyear

2000to2010;however,from2010to2012-2013therewasanoticeabledeclinein

thenumberofTVhouseholds.Thedataindicatesthatalthoughthenumberreaches

alowpointby2012-2013,thenumberofTVhouseholdspicksbackup,butataslow

ratethatbarelysurpassesthe2010mark.Onlinestreamingbecameavailable

around2007,whichcouldpotentiallyexplainthedisruptioninthegraphand

decreaseinTVhouseholdsfrom2010asstreamingbeganpickingupinpopularity.

Nevertheless,theincreaseinpopularityandrevenueofNetflixandHuluthroughout

thefollowingyearsarenotquiteconsistentwiththeincreaseintelevision

householdsfollowing2012.TheownershipoftelevisionsandtheuseofNetflixand

Hulu,however,arenotmutuallyexclusive.Thenumberoftelevisionhouseholds

doesnothaveanycausationalrelationshipwithsatelliteandcableusage,butcan

showarelationshipofcorrelation.TheinconsistencyofNetflixandHulu’sgrowthin

revenueandincreaseinhouseholdtelevisionscansuggestthatperhapsconsumers

havedecidedtousebothmodesofdistributiontowatchTVshowsandfilmsorthat

ratherthansolelyusingtheirlaptops,computers,andsmartdevicestowatchNetflix

orHulu,cordcuttersandcordneversprefertousetheirtelevisionmonitorsto

projectcontentfromNetflixorHulu.

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ThenumberofU.S.householdswithcomputersalsoisanimportantvariable

inunderstandinghowdigitizeddistributionhasbeenabletoenterthemarketand

competewithcableandsatellite.AccordingtotheU.S.CensusBureau,

approximately78%ofU.S.householdshadhigh-speedInternetconnectionin2013

(U.S.CensusBureau2013).ConsumersmusthaveaccesstotheInternetinorderfor

onlinestreamingtobecomeawidespreadtrend,andthemostcommonformof

Internetusageisthroughcomputerownership.Inaspanoftwelveyears,therehas

beena30%increaseinhouseholdswhoowncomputers,with84%ofhouseholds

havingatleastonecomputerbytheyear2013.In2010thereisanoticeable

decreaseinthepercentageofhouseholdswithcomputers,whichisasimilartrend

tothebriefdeclineinthenumberofTVhouseholdsmentionedinFigure3.Thisis

interestingtonotebecauseitindicatesadipincomputerandtelevisionownership

duringthesametimeperiod,whichperhapspointstoexternalfactorsthat

decreasedtheconsumptionofdifferentelectronicgoods.Nevertheless,thedatain

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Figure4showsaclearoverallincreaseincomputerownershipintheU.S.This

implicitlyindicatesthatInternetusagehasincreased,providingaplatformforHulu

andNetflixtocontinuegrowing.

Onlinedistributionhasbeencompetitivewithinthemarketbecauseofits

relativelylowprices.ConsumerscanhaveunlimitedstreamingoptionsonHuluor

Netflixforamonthlypriceof$7.99,whichisanattractivedealconsideringcableand

satellitetelevisionpricesaresignificantlyhigherthanbothpricescombined.

Averagemonthlycabletelevisionpricesareimportanttonotebecausetheyhave

grownexorbitantlyovertheyears.Figure5showsdatareportedbytheFederal

CommunicationsCommissionin2013,revealingaveragecabletelevisionmonthly

subscriptionpricesfrom1995to2013.Thedataassociatedwiththefigureshows

thattherehasbeena$42increaseinmonthlycablepricesduringthistimeperiod.

23

Cableandsatellitetelevisionhavebeenmajorsourcesofentertainmentfordecades

astherehavebeenfewotherdistributionoptionswithinthemarketuntilrecently.

Figure5showsthataveragemonthlypricesofcabletelevisionwereoverthree

timesmoreexpensivein2013thanin1995.Likemostoligopolies,cabledistribution

companieshaverelativelysimilarpricesthatareinterdependentononeanother.

Increasingpricesofcablewillbeimportanttokeepinmindwhenlookingat

revenue.IsTimeWarnerCable’srevenueincreasingatasimilarrateasgrowing

cableprices,orisitsinabilitytolowerpricestorivalthatofNetflixandHulu

influencingitsrevenue?Asstatedwiththeothervariables,thereareoutsidefactors

thatcontributetothedramaticincreaseinprice.Forexample,theremightbemore

channelsandbundlesavailablethathaveincreasedthevalueofcabletelevisionover

time.Anotherexamplemaybethatpricesofrawmaterialshaveincreasedorthe

purchasingofnewtechnologytomanufacturecableboxeshaselevatedproduction

costsforcablecompanies,pushingthemtoincreasepricesaccordingly.Thereare

myriadsofexplanationsthatcancontributetotherisingprices;nevertheless,it

mostlikelystillaffectsconsumers’decisionstopaywhentheyhavetheoptionof

lowerandconsistentpricesthroughNetflixandHulusubscriptions.

ComcastandTimeWarnerCablearethetwodominatingcable

conglomeratesinthedistributionrealm,whichiswhytrendsintheiryearlyrevenue

arerepresentativeofhowthecableindustryasawholeisdoing.Thesedistributors

havefunctionsthatgobeyondvideocableservicesandextendtoInternet,

telephone,andotherservices;furthermore,itisamistaketomerelylookattheir

overallrevenuebecauseitdoesn’taccuratelydepicthowtheircabletelevision

24

businessisdoing.IchosenottoanalyzeComcastbecausedataonitsbusinessistoo

intertwinedtothatofNBCUniversal.Therevenuereportedinitsannualfinancial

reportscombineservicesoftheircorebusinessaswellasrevenuefromitstheme

parks,studios,andcablechannels.Thismakesitverydifficulttodistinguishhow

muchoftherevenueiscomingfromcable,Internetandphoneservices,orfromNBC

Universal.Instead,IexaminedTimeWarnerCable’sannual10-Kfinancialreports

from2006-2014andfounddatathatisbrokendowntoprovidespecificrevenuefor

theirvideocableservices.

Figure6showsTimeWarnerCable’srevenueduringthistimeperiod.In

2006,itsrevenuespikedbyapproximately$3billionandpeakedin2010.From

2007to2008therewasabriefdipinrevenue.Whilethereareseveralfactorsthat

mayhaveinfluencedthisdecreasesuchasthefinancialcrisis,itisworthconsidering

25

thatNetflixlauncheditsstreamingservicesthatyear.Following2007,TimeWarner

Cable’svideorevenuestaysconsistentandlackssignificantgrowth.Infact,from

2012to2014thereisanoverallplungeinrevenue.Giventhatcablepriceshave

risennoticeably,itisinterestingthatTimeWarnerCable’srevenuedoesn’tincrease

atasimilarrate.Perhapsthispointstoalossofconsumerswhoarewillingtopay

higherprices.Thetrendsinrevenuefrom2007to2014provideanoteworthy

contrasttoitsrevenuegrowthfrom2006-2007.Iftherehavebeensignificant

externaleconomicfactorsinfluencingthelossofrevenue,theywouldhavemost

likelyalsoaffectedNetflixandHulu’srevenueandgrowthratesaswell.Figure2’s

datashowingsubstantialgrowthinNetflix’sandHulu’syearlyrevenueoverthis

sametimeperiodindicatesacorrelationbetweenonlinestreamingandanoverall

decreaseinrevenuegrowthintelevisioncableservices.

Conclusion

ThetelevisiondistributionmarkethasbeenaffectedgreatlybyNetflixand

Hulu.Therearevariousviewpointsexpressinghowtheoligopolisticnatureofthe

industryisshiftingasaresultofnewertechnology,butthemajorityoftheliterature

onthistopicconcludesthatonlineplatformsarenecessarytosatisfyconsumer

needsandhaveallowedsmaller,newercompaniestocompetewithlargercableand

satelliteconglomerates.Myanalysisillustratesthatcurrentconsumertrendsand

changesincompanies’revenuespointatarelationshipwhereonlinedistribution

andlowersubscriptionpricesshiftrevenueawayfromolderconglomeratessuchas

26

TimeWarnerCabletoneweronesincludingNetflixandHulu.Furthermore,the

oligopolisticstructureofthemarkethasbeendisruptedasaresultoftechnology,

whichhasremovedmajorbarriersthatoncepreventedsmallercompaniesfrom

succeedingandsurvivinginthisindustry.

Thisthesistookaparticularlycloselookattheeconomictheoryofoligopoly.

Tofindarelationshipbetweenthedistributionrealmandthemajorfirmsthat

dominatethemarket,Iresearchedtheentrancebarriersthathavebeenprevalentin

theindustryaswellascostsandotherlimitationsthathaveshapedtheoligopolistic

structure.Consolidationamongcontentcreatorsanddistributorshaveenforcedan

unequalpowerdynamicamonglargerandsmallerfirmsfordecades;moreover,

contentcreatorsandprovidershaveengagedinanticompetitivebehaviorthathas

madeitnearlyimpossibleforanewerorsmallercompanytoparticipatein

distribution.Technology,however,hasbeenabletoalleviatesomeofthese

obstacles.

Additionally,mythesislooksatabreakdownoftelevisionconsumption

habitsthathavechangedasaresultoftechnology.Consumerbehaviorandtrends

areintegralinunderstandingwhyHuluandNetflixhavebeenabletocompete

againstdominantcableandsatellitetelevisioncompanies.InmydataIfoundthat

thenumberoftelevisionsperhouseholdhassteadilybeenincreasingoverthepast

decade,buttheincreasehasbeenatalowerrateroverthepastfewyears.American

householdshavealsobeenincreasingtheirconsumptionofcomputers,with

approximately84%ofhouseholdsowningcomputersin2013.Aspricesofmonthly

cablesubscriptionescalatedbyabout$20from2007to2013andcontinuerising,it

27

isnotsurprisingthatTimeWarnerCable’srevenuehasdecreasedoverthistime

periodasNetflixandHuluprovidecompellingalternatives.

Thedatapointstorelationshipsamongthevariablesthatsupportthecentral

argumentofthisthesis,butthereweresomelimitationspresent.Unfortunately,

industrydataishardtocollectbecausemuchofitisprivate.Similarly,itisdifficult

tocollectinformationspecifictotelevisionandvideoservicesbecausemajor

conglomeratessuchasComcastreporttheirdataalltogetherorlumptheminto

categoriesthatmakeithardtofindspecificcabletelevisionstatisticsorrevue.My

analysisoftheindustrycouldhavebeendeeperifthesenumbersweremore

accessible.Additionally,thechangesinonlinedistributionhaveoccurredprimarily

since2007.Thisrelativelyshorttimeframegivesmystudyalimitednumberof

observationsanddatapointstolookat,whichiswhyrunningaregressionand

creatingamodelisaparticularlychallengingtaskforthistopic.Eachyearoverthis

timeperiod,therehavebeenchangesintechnologyanddevelopmentsinonline

distributionthatarehardtoaccountforinthedata.Nevertheless,thisrestraint

concerningtimeframeiswhatmakesthistopicworthstudyingbecausechangesin

theindustryareoccurringsorapidly.Ineveryindustry,thevastmodificationsand

advancesintechnologyareinevitablygoingtoimposethissortofdatalimitation,

butatthesametimemarkprogressandgrowth.Intheentertainmentworld,there

hasbeentremendousyear-to-yearinnovationthatcontinuesimprovingtheway

filmsandtelevisioncanbeconsumed.Whileitissomethingthathasbeenshifting

thestructureofthemarket,itisbenefittingconsumersbymakingiteasierand

cheaperforthemtoaccessandwatchtelevision.Myexplorationofdigitalizationof

28

distributionprovidesvaluableanalysisthatcontributestoadiscussionofthe

changesintheentertainmentindustry,butalsospeakstoabiggerissue:As

technologycontinuestoadvanceineveryindustry,itisuncertainhowitmay

interactwithandpotentiallydisruptmanyoligopoly-dominatedsectorsofour

economy.

29

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