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Monday, April 15, 2013

More Cracks Undermine the Citadel of TV Profits

More Cracks Undermine the Citadel of TV Profits

Melinda Sue Gordon for Netflix

The success of Netflix's "House of Cards," with Kevin Spacey and Robin Wright, suggests an attack on TV's practice of bundling.

For the longest time in the media business, the concept of the bundle has been foundational. Ads go with editorial content in print, commercials go with programming on television and the channels you desire are paired with ones you did not in your cable package.

Dish's Hopper, which skips commercials, also seems to attack TV's bundling.

People were free to shop for what they wanted, as long as they were willing to buy a bunch of other stuff they did not. The box score last night for your home team It was wrapped inside a bundle of paper that included everything from foreign news to ads for lingerie. If you liked a song, you generally had to buy an album full of others to get the goods.

As for advertisers, the audience they wanted was bundled inside a much larger audience of people they did not. To get at the milk, both consumers and businesses had to buy the cow.

Television has thrived on this kind of systematic stacking, but though bundles may be a handy way of protecting things, they also tend to obscure the weaknesses within. Those flaws are becoming more apparent as the practice of bundling comes under attack.

Networks are stepping up the fight against Dish Network’s Hopper, which automatically skips the commercials in network programming. Aereo won a court decision on April 1, letting it continue its rollout of a service through which consumers can access broadcast signals online without Aereo paying any of the estimated $3 billion that broadcasters will take in from retransmission fees by 2015.

And tellingly, there has been some breaking of ranks between the companies that make content and the people who send it through the pipes to consumers. Most notably, Cablevision filed an antitrust suit against Viacom challenging its requirement that the cable company carry rarely viewed channels to get access to Viacom’s more popular ones. (Verizon did not join the lawsuit, but is also asking for less bundling and more options.)

Finally, there is the success of Netflix’s “House of Cards,” original programming delivered over the Internet, with no cable required. The company announced on Facebook that customers had watched four billion hours of streaming video in the first three months of the year. As Peter Kafka pointed out in AllThingsD, Richard Greenfield of BTIG Research calculated that eye-popping number would make it the most-watched cable television network. Except it isn’t on cable, isn’t on television and isn’t a network.

Those initiatives represent assaults on different parts of the business, but each is an attack on the bundle, and the legacy industry is reacting ferociously. Aereo is a finger in the eye of broadcasters, prompting some to suggest they might turn off their broadcast signals and become cable channels â€" as Fox threatened last week. (The biggest losers in that situation would be the more than 11 million cable-less households that still depend on antennas.)

Charles Ergen, the chairman of Dish Network, was recently called the “most hated man in Hollywood” by The Hollywood Reporter because he dared to give consumers the ability to unbundle advertising and programming with a touch of a button using Hopper. It brings to mind the scene from Ken Auletta’s book “Googled,” when Mel Karmazin, then chief executive of Viacom, visited Google and saw a demonstration of the company’s ability to target ads. He declared that the company was, um, messing “with the magic.”

That’s because media companies have another word for those consumer inefficiencies: profits.

“The bundle is the Gibraltar of the media business,” said Tim Wu, the author of “The Master Switch,” a history of media revolutions. “It keeps the entire ecosystem alive, which is why it is so heavily and successfully defended. But there are hairline fractures beginning to appear, and you are seeing alliances shift.”

Historically, once the consumer decides, it doesn’t matter what stakeholders want. They can’t stop what’s coming.

The advent of the Internet presented an existential challenge to bundles. Once consumers got their hands on the mouse and a programmable remote, they began to attack the inefficiencies of the system. When seeking information, they sought relevant links, not media brands. And DVRs put them in the control room of their own viewing universe.

Susan Crawford, a professor at the Benjamin N. Cardozo School of Law and the author of “Captive Audience,” says she thinks television bundles will be with us for a while â€" six to eight years â€" regardless of what the consumer wants.

“It’s like the picked-on kid who tries to get home to his front porch; he has to make it past all the bullies first,” she said. “We have a heavily defended, heavily concentrated programming industry and a monopoly in distribution, with none of the big players willing to act like a maverick. No one wants to break ranks because the current system has been so lucrative.”

Of course, the government could get involved, as it did in breaking up Hollywood’s closed system of production and distribution in the 1930s and ’40s. The result was a lot of disruption, a blossoming of cinema in the ’60s and ’70s, and by the way, a movie industry that still has scale and profits.

E-mail: carr@nytimes.com;


A version of this article appeared in print on April 15, 2013, on page B1 of the New York edition with the headline: More Cracks Undermine The Citadel Of TV Profits.