Pundits swear that the proposed merger of Ray Smith’s Bell Atlantic and John Malone’s Tele-Communications Inc. is a bold, brilliant and synergistic meeting of the multimedia minds. They insist that this megadeal signals the opening of – all together now – America’s Information Superhighway. But are they right? Or is this just the latest instance of corporate behemoths discovering that, contrary to the new math of multimedia, two plus two only equals three?
Whatever this merger’s aspirations and expectations, don’t ignore a simple economic reality: If Bell Atlantic/TCI doesn’t evolve into a major medium for advertisers, it will inevitably be a financial failure. Without an enormous investment of advertising and promotional dollars, the so-called Information Superhighway will be the most outrageously expensive toll road America’s media consumers have ever been asked to tour. Without advertiser subsidy, the numbers just won’t – pun intended – add up.
Consider the market facts. Cable consumers have whined, grumbled and complained so much about their monthly bills in recent years that the cable industry actually managed to get itself re-regulated during an era of deregulation. Now people are upset because cable moguls like Malone have somehow managed to raise prices yet again in the face of a regulatory rollback.
Mind you, this has been a consumer revolt against monthly fees of $30-40 a month. That’s not even $500 a year for 40-plus channels. Does anybody believe that cable television service gets any cheaper when the local cable/telephone operator offers a cornucopia of new channel options? Presuming that a media company like Bell Atlantic/TCI wants an above-average rate of return on its network investments, what price will subscribers be asked to pay for a high-bandwidth, interactive, multimedia infrastructure? $45 a month? $60 a month? $75 a month? Or will that ROI burden shift to all those new interactive and multimedia services, so that a cable/telephone household ends up paying $130-150 a month for premium tier?
The belief that couch potatoes are prepared to pay thousands of dollars a year for 500-plus channels, high-bandwidth interactivity and the monthly phone bill flies in the face of everything we know about value pricing and America’s tradition of cheap mass media. It’s absurd. There is no way that the economics of the Information Superhighway make any sense without a new level and kind of advertiser support.
The proposed explosion of channel options completely challenges the traditional reasons advertisers invest in television. You’re asking me to pay a premium so my ad can compete against 499 other channels? Talk about clutter! No way! Even the better advertising-supported cable channels, like CNN and ESPN, already have their share of Chia Pet and aerosol hair-painting commercials. If anything, narrow-casting gives more power to the Procter & Gambles and the Anheuser-Busches because they have more alternatives to reach a fragmenting audience.
This means an info-highway contractor like Bell Atlantic/TCI needs a different model for advertising participation if it’s to have any hope of delivering lower subscription fees as a premium value for advertisers. In the same way that the broadcast distribution strength of the three-network oligopoly once gave networks the balance of advertising power, a Bell Atlantic/TCI has the potential to tilt power from advertiser to distributor – but only if it positions and packages that power wisely.
They need to explore such options as ‘block book spot ads’ that guarantee advertisers simultaneous transmission of a commercial on all the ad-supported channels throughout a national/regional/local network. They have to offer the option of interactive direct response so that advertisers can compare commercial effectiveness. They must also offer addressability, which means advertising on Bell Atlantic/TCI networks will be more like video direct mail and less like a typical broadcast ad. Does this conjure up nasty privacy issues? Of course, but without database-driven advertising and promotion, these networks aren’t in a position to command a premium price.
Unfortunately, unlike QVC’s Barry Diller, John Malone has never really invested his energy in building an advertising-supported network. Neither has Ray Smith. They created channels of distribution without coping with the challenge of advertising. If they want to build the networks to watch, they now have no choice but to recognize that you can’t build an affordable Information Superhighway without billboards.
Please fax comments to Michael Schrage at 212-536-1416.
Copyright Adweek L.P. (1993)