a16z Podcast - a16z Podcast: The Future Of Television

Episode Date: April 18, 2014

Can technology companies show up and disrupt television with an onslaught of new gizmos and services, or is content still the controlling factor? What will it take in terms of money, business model and time to upend the TV model that has stubbornly persisted for decades? Will the old platforms and players dominate, or is now the time for new players to take charge? Andreessen Horowitz’s Benedict Evans and Zal Bilimoria discuss the future of television.

Welcome to the A16Z podcast. I'm Michael Copeland, and I'm here today with Benedict Davins, Benedict. Hello. And Andreessen Horwitz partner, Zalbel Amoria. Hi, how are you doing? Good. So we're going to talk today about the future of television. And I know you guys are going to disagree from the get-go on what television actually is, or if that's the right way to describe this.

So, Benedict, I see the eyebrows raised. Well, I always like to disagree with everything on principle. I think there's a, I mean, I wrote a blog post a week or two ago called sort of Notes on TV. And part of the reason I gave it that title was because you've got two or three or four different blocks here that are all kind of almost independent of each other. So in the USA, there's a question around the control of content and the willingness of cable operators and channel operators and content owners to allow a different operative consumption model. and there's a lot of industry dynamics that make them very reluctant to do that because, as I said, everybody hates the way US TV works except the US TV industry. And there's a lot of very strong incentives and very strong power relationships

that mean you can't just turn up with a new device and somehow get a completely different experience. And then there's a second question around the availability of devices and what kind of device it would be and what the experience would be, presuming for the sake of argument, anything you wanted to watch was available on that device. Well, what would that be? Would it be touch? would it be on the TV, would it be a tablet, what would that actually mean? And then there's a third question, which is, well, what are people actually want to do,

presuming that you had that nirvana of every device, of the right content on the right device, would people switch all of their viewing over to a pure on-demand experience, or would that make up, you know, 10, 20% of your viewing and you'd still watch schedule TV. And there's a final one, which is, you know, when we say TV, what do we even mean when we say that? Which, you know, they kind of flow through. And so they're all these kind of separate moving parts around this. this puzzle of, you know, we've had this communal experience for the last 50, 60, 70 years.

And every piece of that is now getting attacked. And this is very brittle thing around the US TV market structure. And then there's a bunch of problems around what the device is. But presumably you solve all of those. It's still really kind of open-ended as to what that would actually mean. Zal, you know, I want to bring you in and I don't want to brand you as the attacker, but you did run mobile at Netflix. So you grappled with all these questions that.

that Benedict is laid out. And is he heading off in the wrong direction already, or where do you see the common ground? Well, you know, I think the definition of television, you know, we're talking about future of television here, it's really interesting because television is essentially just video on a screen. And like you said, you know, what device is it on? What content are you viewing?

And is it linear or is it time shifted or whatever the case might be? And, you know, I think at Netflix we saw that growing shift to mobile. We saw that growing shift to not only from the TV, linear programming model, but, you know, I think more than 60% of streaming hours on Netflix are coming from the major game consoles. So even the game consoles are getting into it with PS3, Xbox, Wii, et cetera. So it's not even the native software on TVs that are driving this, but actually the hook-in. So, you know, I think television is an interesting term, whether we talk about the future of video or the future of television, I think we're talking

about video entertainment on any device. Yeah, I mean, I think there's a, there's a kind of a principal point, which is you're going to move towards more of a curve. That is to say, the economics of broadcast TV led you to certain types of content, certain types of schedules, just as the economics of the printing press led you to books had to be over a certain length, and magazines had to be over a certain size, and so on. And so you have some different things around, well, you have long-tail content. But you also have, I mean, if you look at, for example, the BBC does stats for eye-player consumption, and you look at the viewing, and it's all, you know, the top soap operas, the top TV shows,

and it's all catch-up for what was on in the last seven days. So there's this sort of fantasy that, you know, again, the same thing you see for Netflix, actually most of what people want to watch is concentrated in quite a small segment where the economics get concentrated. It's almost like it's L-shaped rather than a curve. That's right. That's right.

I think, you know, the hits are really starting to drive, I think Netflix is business, which is why they realize that they can spend $100 million to actually fund a total of 26 episodes across two C's. seasons for House of Car. It's actually, it's probably much more than 100 million. I heard from Kevin Spacey in an interview that it was much more than $5 million an episode to even fund that thing. So I think, you know, Netflix has moved from a movie, you know, streaming company into a TV streaming company, and that's just happened in the last few years. And I think

people want that short form content. They want to be able to watch that anywhere, any time. And they want to be able to do that either in, you know, one at a time or, you know, back to back. And, you know, I think many people, including myself, did a marathon weekend when season two came out of House of Cards. Yeah, it's kind of funny that Netflix went from posting you 10-year-old content to streaming stuff live. So kind of they moved all the way along the release cycle up to, you know, it's up today and you watch it all at once. I mean, there's a sort of set of questions around, you know, how that stuff gets made because Netflix obviously have data and Amazon has data. and the TV companies traditionally didn't have data and used the sort of pilot system to work out,

well, what are we going to make? And so there's arguments about how you can make programming more efficiently. But at the same time, it's still, as you said, hundreds of millions of dollars to make this stuff. I remember somebody coming up to me and saying, well, what would it take to completely disrupt the US TV market? How much would you have to spend? And I'm like, I don't know, $10 billion, or $20 billion?

It's the same as well. How much would it cost me to build a nationwide cellular? network with wireless, with Wi-Fi. It's like, uh, 20, 30 billion dollars. Yeah. It's where it costs. So the money, the, and there's always this sort of misperception that you can turn up with technology and disrupt it.

But actually the point of Netflix and the reason why the existing model is so strong is it's actually, no, it's the content that's the lock on all of this stuff. And having the business model to make the most amount of money possible out of that content is the crucial thing, which incidentally is why I don't think it makes any sense for, well, come at it slightly differently, you have Apple and Google and various other people talking about commissioning content. Yahoo and Microsoft. And the question is, well, is what you're talking about seeding your platform so that it will be a bit more attractive for consumers, or are you actually saying, do you know what, we're going to be a TV company and spend billions and billions

of dollars to really go in and play in that space? So let's talk about that. How is the relationship between the likes of Netflix, HBO, Comcast and other cable providers, satellite for that matter, changed. So there's the content creators, there's the pipes, there's these technology companies ostensibly who are now getting into original content. Has anything changed in that sort of dynamic? I think people are realizing that original content programming is the way to go. I mean, Yahoo just, I think today or yesterday announced that they are looking at purchasing the rights of four television shows. And, you know, as, you know, Yahoo and Marissa May are trying to figure out how to become, you know, a world-leading content and media company once again, you know,

it may be the direction to go, but it's going to be costly. It's not going to be cheap. Now, you know, House of Cards is a very, very well-produced program at $5 to $6 million an episode. You might be able to get away with it at $700,000 an episode, but what does that actually lead to in terms of quality for the viewer? And, you know, I think these large companies realize in order to, you know, obtain that audience that they need to be able to put out great content, obviously. And so, you know, there are certain, even in, let's talk about YouTube for a second, actually. So Maker Studios was just recently purchased by Disney for $500 million, with another $450 million if they meet the aggressive goals.

And, you know, they've got whatever it was, I think, over 50,000 channels on YouTube across, you know, all those 400 million subscribers across that content. And so they've aggregated content in the very best of the content. content to create a platform that is actually quite monetizable on YouTube and other platforms. And so you could do it the subscriber way or you could do it to add modeled way. The point is you need to be able to attract the best and brightest talent. Well, the point is I think, I mean, there's kind of a virtuous circle in the TV business in that you have audience and therefore you have revenue and therefore you have great content

and therefore you have audience. And you need to make a decision as to how much money you want to inject into that cycle. I mean, the analogy that I use is a bit like orbital mechanics. If you want to get into orbit, you need to burn an enormous pile of kerosene. And the higher you want to go, the more kerosene you have to burn. And it doesn't really matter what engine you're using, basically. It only doesn't blow up on the pad. Fundamentally, it's all about the weight of kerosene that you burn and the energy and, you know,

the chemistry and the physics of that. And you want to go to a higher orbit, you have to burn more kerosene. You can't design a better rocket. And TV industry is kind of like that. You can't turn up with a better rocket. Actually, all you have to do is turn up with an enormous tank full of kerosene. you have to turn up with an awful lot of money. That's right.

And the puzzle for me in these technology companies getting into this is to ask, well, what are you actually trying to achieve? So, again, I'm sort of at the risk of overloading this with more metaphors. I wrote a blog post about telecoms in which I said that, you know, there's this old story that somebody decides that the train service between London and Cambridge is terrible, so they're going to build a bus service. And then they decide that actually to make the economics work, they need to get eight buses linked together

and then they need to raise a bunch of money and build a dedicated road from London to Cambridge. And the point of the joke is that you need to decide what is you try to do. Buses are better than trains because they're more flexible and you can, you know, all about a bunch of what we're reasons. But actually, if you want to compete with a train service,

you're going to end up building a train service and you might as well face up to that at the beginning and say, well, are we actually planning to invest what it would cost to become NBC Universal? because the only way you're going to become NBCUniversal is by spending that much money. And so then you say, well, actually, if you want to do that, maybe you should just buy NBC Universal.

And then you say, well, why would you do that, though? Why would Yahoo buy NBC Universal? Why would they buy CBS? What would be the point of Yahoo or Apple or Google owning that business? Why would CBS be worth more if Google owned it? Well, I think it's the data on top. And the question is, well, is it, and how far down that line do you want to go? And so this is my question about what Yahoo, and sort of Netflix, I think, is slightly different

because Netflix is kind of a cable channel. Netflix is in the content business that happens to use technology to do interesting and new and disruptive ways to things. Whereas for Google or for Yahoo or for Apple, the question is, well, what are you actually are trying to do? Are you trying to build the content business here? Or are you trying to sell devices or get more people engaging in your ecosystem? And if it's the latter, then, well, you're going to put a few.

interesting pieces of content in there to make your device a bit more appealing relative to the PS3 or to make your Apple TV more appealing relative to the Amazon fire or you're going to Amazon you're going to buy a bit more content so the Amazon fire device will seem a bit more appealing relative to the Apple TV and that will get you more customers for Amazon Fresh and so what is it you're trying to achieve here are you trying to build a train system or do you want to have a London or do you just want to have a simple nice little local bus service that has a whole bunch of other objectives because as I said actually if you want to be NBC universal you're going to you there's no what Google isn't going to do that any better than NBC

absolutely no I think I think with with Netflix and some of these other large providers I think as far as technology companies go you know they're using data to actually figure out what the right yeah exactly but they're great call they're building a great content company that's right that's right they're focused on that that is their that is their goal absolutely so the future of television sounds like the present and the past well Well, I mean, there's a question here we haven't really talked about, which is, and this is the thing occurs to me looking at the fire TV thing. She's if you look at what happened to the music business,

music was an ecosystem battleground, and it's turned into a checkbox commodity feature that you throw into any new product as like something you have to have. You know, you're launching a phone, you're launching this, you've got to have a phone in music service. But nobody really cares anymore, because it's all gone streaming, there's no switching costs, so it's become a generic commodity.

And now it feels like maybe the ecosystem battleground has moved on to TV. And so it's Apple or it's Google or it's Amazon. Facebook doesn't have a TV product for some reason, presumably. I don't know what the next $10 billion deal. Zuck will do. We'll go out and buy Netflix. But you look at the fire TV and how many different TV services are on that? There's like 10, 15?

It's the funny thing in the UK. Amazon is fighting. and battle to the death with Netflix and really super-aggressive pricing trying to squeeze Netflix out of the UK market. In the US, that's not really the point at all. It's just Amazon video, Netflix video, whatever, get them on the device and get them to buy groceries from us,

get them to buy diapers from us, get them to buy headphones from us, and the TV is a loss leader. So there's this question around, as I said, what is the purpose of this and what is the end game for how valuable the TV distribution platform becomes? Yeah, I think, you know, I mean, so I think there's going to be a monumental Supreme Court case that's going to start in two weeks with Aereo, right? So if you don't know what Aereo, that's basically they lease you an individual antenna and you can actually stream that content from any device from anywhere based on that. And they're going up against the big dogs, the NFL, MLB, the ABC.

All these guys are thinking this is going to be, you know, over the top retransmission. And so they're trying to fight against it. But, you know, talk about the facts, you know. It's a lovely hack. It's a lovely hack. It's a regulatory hack. It's like Nextel. That's right. That's right.

aren't some of the best software businesses based on regulatory hacks? Yeah, but the question about regulatory hacks is whether you can actually, whether you're cutting through some sort of fake pricing structure to get to the real underlying economics, or whether you're just hacking the pricing scheme. Yeah. I mean, long distance is a great example of that, where there was no reason why long distance was expensive as it was anymore.

But there's other things where, you know, people can just change the rules. You're dependent on, you're basically exploiting a piece of marketing that other people have done, and they can just change that and cut you off. So there's a puzzle there around how all of that US content gets unlocked. But then the broader question, as we say, is, well, supposing it does all get unlocked, well, what is the device experience like? Is it fire?

Is it Apple TV? And the puzzle I have around all of these devices is all sort of pre-ipod. You know, it feels like they're all sort of, you know, it's like the joke, I'm playing all the right notes, not necessarily in the right order. You've got all of the kind of the pieces are there, but the usage is still really low relative to T. TV. And particularly if you look at the UK, you can have, you know, all the stuff we've been talking about, the availability of content. That issue doesn't apply at all in the UK. So all the,

all the broadcasters that you would want to watch, all your stuff is there on any device at any time in any way. There's no kind of no screwing around. And yet the viewing is, you know, peak viewing for iPlayer, which is basically all the BBC's content is like 750,000 streams. And peak TV viewing is like 25 million. And the peak, the TV viewing isn't going down. And the iPlay viewing is It's kind of going up a bit, but it ain't no hockey stick. So are we waiting for the right device? Are we waiting for that experience? Or is there like a consumer demand desire problem in here?

Well, I think, and you spoke about it, and I know others have as well, as far as, like, you know, dumb glass, internet machines, essentially. And that's kind of what Google and Netflix did together in the kind of the formation of dial, which is that discovery and launch open source protocol that says, take anything, whether it's a smartphone, a laptop, or a tablet, it, et cetera, and be able to stream that into any other device, right? And so Chromecast is based off of the dial standards. Netflix's MDX, multi-device experience, is based off of the dial standards.

And, you know, obviously the rival is Apple Airplay, right? And so, but these kinds of scenarios where I can take anything that's kind of, you know, that I use regularly, whether it's my phone, my tablet, or my computer, and be able to port that and show that content on any, you know, on any screen, including the favorite television. You can squirt it to the TV as Steve Baumers. wonderful phrase. Well, on that note, it sounds to me that

the future of television, you know, Benedict, you're still waiting for the right device to right experience, and until then, we get more of the same in some sense.

Well, we do, but then there's that, you know, there's this kind of, again, it's the kind of the music industry question is, you know,

we're kind of fixated on I've got to pay for all these channels that I don't want. But the more interesting thing is, well, if you can pick arbitrarily which shows you want, then what does that do to all the other shows? So it's not really

the unbundling, which of course is a puzzle for Netflix as well, but it's not really the unbundling of ESPN from AMC. It's the unbundling of Madman from AMC. That's the question. If you go to all everything's there on demand and it's all ad-supported and a lot of this stuff is free ad-supported, then what happens to all the other stuff? And when the TV, channel can see in a really, really detailed way, nobody's watching that show, then a lot of those purchasing decisions start to change and commissioning decisions start to change. I mean, you can see it obviously the way Netflix is using data now, but you have a question, well, how much TV will get made and how much TV will get watched, and how much of the TV that

you watch now, because it's on at 8 o'clock on the Saturday night, but you'd never actually go in, no matter what the interface was, you'd never have chosen to watch that, you know, You'd never watch, you know, celebrity backside wiping with Ryan Seacrest, you know, but it's there, so you watch it. So how did, it's, you know, and again, it's an analog with the CD business, you know, the two tracks you want and the 10 you don't. How does that whole business change when you can choose anything you want? That's right.

I mean, there was two metrics at Netflix that every product manager was geared toward. It's subscriber retention and streaming hours. The most highly correlated variable to subscriber attention was streaming hours, right? And so our job was, as soon as you open up the. app diving straight into content, right? And so that's why we introduced the new Continue Watching Road, because we realize that people are in the middle of watching something. They may not be, you know, extremely excited about the content, but listen, they're in the middle of it. It's on there. It's at the top of the home screen. Let me click on it and let me just

start playing it because I've had a long day and I just want to continue watching it at 8 o'clock at night, which is very similar to kind of the linear programming model that we see in traditional television. Well, it's like the, you know, the Letterman argument that you didn't get the ratings of Lenny because of like there was a different lead-in before Lenny. versus before Letterman, you know, that all of a sudden, those people are going to be saying, well, those guys at Netflix, they're screwing me because I'm not in the right place in the algorithm.

Well, gentlemen, we will continue watching this. Sorry, Zal, for a bad pun. And I thank you guys for coming. Benedict and Zol. Thank you. Thank you.