Claremont Colleges
Scholarship @ Claremont
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&e Impact of Technology on the Entertainment
Distribution Market: &e E%ects of Net'ix and
Hulu on Cable Revenue
Nicole P. Aliloupour
Scripps College
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!
THE!IMPACT!OF!TECHNOLOGY!ON!THE!ENTERTAINMENT!DISTRIBUTION!
MARKET:!THE!EFFECTS!OF!NETFLIX!AND!HULU!ON!CABLE!REVENUE!
!
!
!
!
!
!
by#
NICOLE!ALILOUPOUR!
!
!
!
!
!
!
SUBMITTED!TO!SCRIPPS!COLLEGE!IN!PARTIAL!FULFILLMENT!!
OF!THE!DEGREE!OF!THE!BACHELOR!OF!ARTS!
!
!
!
PROFESSOR!SEAN!FLYNN!
PROFESSOR!ROBERTO!PEDACE!!
!
!
!
DECEMBER!11,!2015!
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Abstract!
!
Online# streaming# has# revolutionized# the# way# that# people# consume#
films#and#television.#This#study#will#examine#how#Netflix#and#Hulu#have#
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#
existing#literature#on#the#topic#will#explore#the#influence#of#the#Internet#
on#the#entertainment#distribution#oligopoly#as#well#as#consumer#trends#
and#behavior#favoring#Netflix#and#Hulu.#Additionally,#data#from#2007#to#
2014# will# be# used# to# analyze# variables# that# indicate# a# correlation#
between# Netflix’s# and# Hulu’s# growth# and# Time# Warner# Cable’s#
decreasing#revenue.##
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3#
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Table#of#Contents#
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Introduction..................................................................................................................................................4#
Related#Literature......................................................................................................................................5#
The#Entertainment#Market#Oligopoly#...............................................................................................6#
Technology’s#effect#on#the#longstanding#oligopoly...................................................................10#
Consumer#Influence................................................................................................................................12#
Newer#Players#in#the#Distribution#Market....................................................................................13#
Shortcomings#of#the#Literature..........................................................................................................14#
Data#and#Variables.......... . ..................................................................................... ...................................17#
Conclusion................. ........................................... .......................................................................................25#
References...................................................................................................................................................29#
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#
4#
Introduction!
Rapid#technological#innovations#over#the#past#10#years#have#disrupted#
entertainment#distribution#in#a#way#that#has#been#unprecedented.#As#personal#
computers,#laptops,#tablets,#and#smartphones#have#become#common#household#
goods,#emerging#companies#have#embraced#technological#advancements#and#
incorporated#them#into#their#business#models#to#create#a#revolution#in#the#way#that#
audiences#consume#entertainment.#New#firms#such#as#Netflix#and#Hulu#have#grown#
through#the#use#of#the#Internet#as#a#platform#to#distribute#films#and#television#series,#
cutting#costs#such#as#physical#inventory,#set-top#boxes,#remote#controls,#and#
modems.#Nevertheless,#they#are#able#to#offer#customers#a#large#variety#of#shows#and#
movies#that#satisfy#both#popular#and#niche#demands.#
These#newer#companies#bring#a#wider#assortment#of#television#and#video#
content#to#consumers#who#previously#were#harder#to#access.#Rather#than#delivering#
a#bundle#package#of#generic#television#stations#or#only#offering#big#commercial#
content#at#a#high#price,#they#have#a#library#that#also#contains#independent#films#and#
productions#that#never#made#it#to#theaters#or#larger#rental#services.##The#larger#
supply#of#video#content#and#lower#costs#associated# w ith#distribution#allow#for#more#
competitive#pricing#among#the#newer#companies#that#are#disrupting#the#old#film#and#
television#oligopoly.#If#Netflix#and#Hulu#are#able#to#enter#the#oligopoly#and#decrease#
prices#significantly,#how#does#that#effect#cable#firms#including#Time#Warner#Cable#
who#haven’t#adjusted#prices#accordingly?##
In#this#thesis,#I#analyze#Netflix#and#Hulu#to#understand#how#technology#has#
opened#the#door#for#smaller#firms#to#enter#this#oligopoly;#furthermore,#an#overall#
#
5#
decline#in#Time#Warner#Cable’s#revenue#indicates#that#low,#competitive#subscription#
prices#set#by#Netflix#and#Hulu#are#adversely#affecting#cable#firms’#ability#to#compete.#
I#look#at#technological#shifts#that#have#occurred#over#the#past#seven#years,#how#these#
companies#have#incorporated#them#during#these#specific#periods,#and#patterns#in#
prices#and#revenue#throughout#this#timeline.#Examination#of#variables#pertinent#to#
both#consumers#as#well#as#Netflix,#Hulu,#and#Time#Warner#Cable#will#develop#a#
bigger#picture#of#how#the#supply#and#demand#for#entertainment#has#shifted#and#
affected#cable#revenue.###
#
Related!Literature!
#
Technological#innovation#over#the#past#ten#years,#especially#through#easy#
access#and#the#commercialization#of#the#Internet,#has#revolutionized#film#and#
television#distribution.#The#ever-changing#nature#of#technology#and#consumer#
behavior#has#prompted#rapid#changes#in#distribution#methods#from#year#to#year,#
making#this#an#intriguing#topic#of#research#within#economic,#business,#legal,#and#
media#sectors.#Tom#Evens#(2014)#dissects#the#clash#of#television#platforms,#drawing#
macroeconomic#and#microeconomic#analyses#of#the#role#that#technology#has#in#
disrupting#or#shifting#the#market.#Camille#Johnson#(2014)#uses#a#legal#lens#to#
examine#how#the#current#distribution#oligopoly,#threatened#by#emerging#consumer#
trends#supporting#online#distribution,#may#need#government#intervention#to#keep#
media#conglomerates#from#using#restrictive#practices#that#block#new#companies#
from#emerging.#Additionally,#Alejandro#Pardo#(2013)#focuses#on#Hollywood’s#
#
6#
distribution#renaissance#and#how#existing#business#models#must#adapt#to#
technological#changes#in#order#to#remain#competitive.###
#
The!Entertainment!Market!Oligopoly!
# In#economics,#an#oligopoly#is#a#market#structure#or#industry#that#is#heavily#
influenced#and#dominated#by#a#few#large#firms.#The#small#concentration#of#
companies#within#oligopolies#results#from#barriers#to#entry,#such#as#high#costs,#that#
keep#newer#and#smaller#firms#from#partaking#in#the#market.#The#goods#that#these#
profit-maximizing#companies#produce#are#almost#exactly#the#same,#which#is#why#
firms#are#constantly#competing#to#dominate#large#shares#of#the#market.#As#a#result,#
they#are#interdependent#on#one#another,#keeping#similar#prices#to#stay#competitive.#
Oligopolistic#firms#tend#to#have#control#over#supply,#giving#them#significant#
influence#over#prices.#Nevertheless,#pricing#tends#to#be#consistent#among#all#firms#
because#they#risk#losing#revenue#and#market#shares#to#competitors#if#they#raise#the#
prices#of#their#goods.#Conversely,#if#they#decide#to#lower#prices#of#their#goods,#other#
firms#will#have#to#do#the#same#to#remain#competitive.###
Mass#distribution#of#entertainment#content#tends#to#be#done#through#cable#
and#satellite#television,#as#this#is#the#most#common#mode#for#people#to#consume#
television#and#films.#Bloomberg#reports#industry#leaders#and#their#market#shares#in#
the#cable#and#satellite#industry,#indicating#that#there#are#ten#major#firms#in#the#
North#America#sector#comprised#of#the#following#companies:#Comcast,#Direct#TV,#
Time#Warner#Cable,#DISH#Network,#Charter#Communications,#Cablevision#Systems,#
Echo#Star,#Shaw#Communications,#BCE#Inc.,#and#Rogers#Communication.#Of#these#
#
7#
companies,#Bloomberg#specifies#that#Comcast#has#the#highest#sales#followed#by#
Direct#TV,#Time#Warner#Cable,#and#DISH#Network.#Comcast#has#a#market#share#of#
26.7%,#Direct#TV’s#market#share#is#20.5%,#Time#Warner#Cable#has#a#share#of#
14.20%,#and#DISH’s#share#is#9%#(Bloomberg#2015).#These#four#companies#together#
hold#70.4%#of#industry#shares,#and#the#six#other#companies#combined#have#a#mere#
29.6%#(Bloomberg#2015).#A#$202.5#billion#industry#controlled#and#run#by#a#
relatively#small#number#of#firms#is#a#strong#indication#of#an#oligopoly.##
Evens#analyzes#the#entertainment#distribution#market#through#
characteristics#including#industry#concentration,#number#of#buyers#and#suppliers,#
entry#barriers,#and#technological#changes#to#evaluate#its#oligopolistic#nature.#
Economies#of#scale#are#prevalent#in#cable#and#satellite#distribution#markets#within#
the#entertainment#industry.#American#entertainment#and#leisure#consists#largely#of#
film#and#television#consumption,#which#is#why#the#majority#of#households#tend#to#
purchase#these#services.#High#demand#for#entertainment#programs#means#that#
companies#in#this#industry#can#produce#their#“goods”#at#a#larger#scale#and#decrease#
input#costs.#Furthermore,#consolidation#is#a#significant#characteristic#in#media#
distribution#as#a#means#of#maximizing#efficiency#in#this#economic#setup.##
Mergers,#acquisitions,#and#vertical#integration#increase#these#firms’#
competitive#positions#and#bargaining#power#significantly,#which#has#led#to#a#
tendency#of#oligopolistic#control#(Evens#2014).#To#support#Even’s#observations#
about#industry#consolidation,#one#can#look#at#the#number#one#leader#in#cable#
distribution.#Comcast#is#a#major#conglomerate#whose#services#extend#beyond#
providing#cable#television,#Internet,#and#phone#services.#It#bought#NBC#Universal,#
#
8#
another#major#conglomerate#that#owns#studios,#theme#parks,#broadcast#networks,#
and#cable#channels.#Additionally,#Time#Warner#Cable#has#the#second#highest#market#
share#in#cable#distribution.#Along#with#its#function#as#a#cable#company,#Time#Warner#
Cable’s#assets#include#HBO,#Warner#Brothers,#Cartoon#Network,#CNN,#New#Line#
Cinema,#and#more.##Comcast’s#ownership#of#NBC#Universal’s#content#and#Time#
Warner#Cable’s#ownership#of#Warner#Brothers#and#other#assets#have#clear#
advantages#because#they#control#their#own#supply#chain.#With#the#ownership#of#
content#creators,#they#can#generate#and#negotiate#favorable#deals#for#their#core#
businesses#while#increasing#content#prices#for#competitors.#
Film#and#television#distributors’#consolidation#has#created#an#industry#with#
less#competition#and#much#more#bargaining#power.#In#the#market#structure,#there#is#
a#larger#group#of#broadcasters#and#a#small#number#of#major#distributors.#The#
number#of#competitors#in#distribution#is#a#major#indicator#of#the#oligopoly#and#
points#to#the#difficulty#that#smaller#competitors#have:#“The#strength#of#a#firm’s#
competitive#position#ultimately#depends#on#the#presence#of#substitutes,#and#the#
ability#of#suppliers#(or#buyers)#to#bypass#powerful#parties#to#bargain#better#
commercial#terms”#(Evens#2014).#Evens#suggests#that#pooled#bargaining#or#
collective#action#may#be#a#useful#strategy#for#smaller#or#newer#companies#to#have#
more#bargaining#power#when#competing#against#consolidated#or#vertically#
integrated#conglomerates.#Johnson#claims#that#alternatively,#smaller#companies#who#
are#not#part#of#the#vertically#integrated#system#have#a#hard#time#competing#and#are#
typically#forced#to#integrate#through#unfavorable#arrangements#with#the#bigger#
video#programming#distributors”#(Johnson#2014).##
#
9#
Barriers#to#entry,#including#high#entry#costs,#have#historically#protected#
major#entertainment#companies#from#competitive#entry,#reinforcing#bargaining#
power#in#television#markets#as#well#(Evens#2014).#In#particular,#these#prices#include#
content#and#physical#capital.#Television#distribution#has#typically#been#done#through#
cable#and#satellite,#as#consumers#are#able#to#watch#programs#on#their#TVs#through#
cable#boxes#and#satellite#dishes#set#up#in#their#households.#The#price#of#content#is#
high,#especially#for#newer#firms#who#don’t#have#established#relationships#with#
content#creators.#As#mentioned#before,#Comcast#and#Time#Warner#Cable#own#
content#supply#and#can#obtain#favorable#deals#for#them.#What#impact#does#this#have#
on#emerging#firms?#Comcast#and#Time#Warner#Cable#can#engage#in#anticompetitive#
behavior#that#limits#the#content#that#NBC#Universal,#Warner#Brothers,#etc.#are#
willing#to#sell#to#these#newer#firms#or#may#try#to#block#them#out#completely#by#
signing#exclusive#deals.#Additionally,#they#may#price#the#content#at#an#
astronomically#high#cost#that#newer#and#smaller#firms#won’t#be#able#to#pay.#This#
strengthens#power#dynamics#among#oligopolistic#companies#and#keeps#the#industry#
concentration#small.##
# The#second#entry#cost#that#is#detrimental#for#newer#companies#is#the#price#of#
physical#equipment#they#must#invest#in#(Johnson#2014).#2014#Bloomberg#reports#
project#the#growth#rate#in#sales#revenue#for#Comcast#to#increase#7.7%#in#2015#and#
Time#Warner#Cable#to#grow#3.43%#(Bloomberg#2015).#With#this#amount#of#growth#
for#such#large#companies,#these#two#firms#have#the#means#to#continue#mass#
investment#on#capital#and#equipment#such#as#cable#boxes.#Smaller#firms#looking#to#
enter,#however,#would#have#to#put#down#a#massive#investment#for#equipment#that#
#
10#
they#can’t#guarantee#will#be#sold.#Having#inadequate#initial#funds#for#investment#and#
a#weak#client#base,#new#firms#may#face#challenges#breaking#into#the#cable#industry#
or#staying#afloat.#The#absence#of#public#industry#data#indicating#how#much#cable#
companies#are#paying#for#the#production#of#cable#boxes,#machinery,#raw#material,#
makes#it#hard#to#determine#the#price#new#firms#would#have#to#invest#in#order#to#
manufacture#cable#boxes.#It#is#unrealistic#to#assume#that#an#emerging#firm#would#be#
held#in#comparison#to#Comcast#or#Time#Warner#Cable,#but#the#company#would#at#
least#need#to#be#comparable#to#Rogers#Communication#in#order#to#enter#and#remain#
competitive#in#the#oligopoly.#Bloomberg’s#industry#data#indicates#that#Rogers#
Communication#has#the#smallest#market#share#in#the#industry#with#a#total#of#2.02#
million#North#American#subscribers.#To#be#on#an#equal#playing#field#as#Rogers#
Communication,#an#emerging#firm#needs#to#be#prepared#to#service#a#similar#amount#
of#customers;#moreover,#it#would#most#likely#have#to#invest#in#the#production#of#
about#2.02#million#cable#boxes.#This#massive#investment#may#be#particularly#risky#
for#smaller#firms#who#are#unsure#if#they#will#make#it#in#the#industry.#High#entry#costs#
as#well#as#vertically#integrated#corporations’#exclusive#access#to#content#have#
limited#the#number#of#firms#that#can#enter,#compete,#and#survive#in#the#distribution#
realm.###
!
Technology’s!effect!on!the!longstanding!oligopoly!
Technological#innovation#has#been#a#major#factor#that#can#potentially#disrupt#
competition#and#the#status#quo#of#the#industry’s#structure.#Evens#claims,#“New#
technology#erodes#entry#barriers#and#challenges#oligopoly#control#over#bottlenecks#
#
11#
that#give#rise#to#gatekeeping#power”#(Evens#2014).#Pardo#echoes#this#sentiment#that#
technology#such#as#the#Internet#has#been#erasing#borders#and#shifting#paradigms#of#
television#distribution#that#were#once#defined#and#controlled#by#these#major#firms.#
Pardo#explains#that#Hollywood#is#currently#at#a#digital#crossroad#characterized#by#
two#central#movements:#“On#one#hand,#the#emergence#of#a#new#market#for#the#
commercialization#of#audiovisual#products#(Internet,#digital#reproduction#devices,#
smart#phones,#smart#TVs)…and,#on#the#other,#the#emergence#of#a#new#type#of#
consumer,#known#collectively#as#‘the#iPod-‘#or##‘the#Net-generation’#(Tapscott#2009)”#
(Pardo#2013).#Because#of#the#abundance#of#consumers#who#have#access#to#the#
Internet#and#devices#that#connect#to#the#Internet,#companies#such#as#Netflix#and#
Hulu#did#not#need#to#invest#in#such#high#entry#costs,#capital,#and#labor#for#their#
streaming#services;#moreover,#their#businesses#rely#on#Internet#access#in#order#to#
function,#avoiding#the#need#to#purchase,#manufacture,#and#install#cable#boxes#or#
satellite#dishes.####
With#lowered#initial#barriers,#there#is#potential#for#more#competition#among#
distributors.#While#Evens#argues#that#entry#barriers#have#decreased#in#the#face#of#
digital#abundance,#he#believes#that#they#are#stil l#likely#to#persist#because#of#the#
presence#of#economies#of#scale#(Evens#2014).#Nevertheless,#he#claims:#“Digital#
technology#not#only#increases#efficiency#in#the#supply#chain,#but#also#tends#to#shift#
bargaining#power#to#those#parties#that#adapt#quickly#in#order#to#reap#the#fruits#from#
the#new#digital#opportunities”#(Evens#2014).#Newer#companies#in#the#distribution#
realm,#particularly#Netflix#and#Hulu,#have#built#their#company#models#in#ways#that#
#
12#
mirror#and#quickly#adapt#to#technological#innovations,#forcing#established#firms#to#
keep#up.##
#
Consumer!Influence!
Consumers#have#a#vital#role#in#the#changing#distribution#market.#While#
Johnson#and#Pardo#refer#to#changing#television#audiences#by#different#names,#they#
both#agree#that#technology#has#had#a#significant#impact#on#the#way#that#audiences#
consume#and#watch#television.#Johnson#refers#to#two#different#types#of#emerging#
consumers#who#are#threatening#the#traditional#distribution#model.#She#describes#
“cord#nevers”#as#a#group#of#“tech#savvy#‘20-somethings’”#who#have#never#subscribed#
to#traditional#multichannel#video#programming,#opting#for#Internet#streaming#
options#instead.#Cord#cutters#are#consumers#who#previously#paid#for#cable#or#
satellite#television,#but#have#decided#to#stop#subscribing.#Like#the#cord#nevers,#they#
have#chosen#to#access#television#and#programs#through#the#Internet#instead#
(Johnson#2014).#Rather#than#examining#emerging#audiences#based#on#their#
television#viewing#habits,#Pardo#looks#to#their#ability#to#keep#up#with#technological#
devices#to#determine#their#behavior.#He#frames#the#digitization#of#entertainment#
with#“the#rapid#expansion#of#the#‘Apple#ecosystem’”(Pardo#2013).#Since#2001,#Apple#
has#succeeded#in#selling#over#140#million#iPods,#prompting#equally#successful#sales#
of#iPad,#iPhones,#and#other#devices#(Pardo#2013).#Additionally,#Apple#
commercialized#more#than#3#million#movies#as#well#as#100#million#episodes#of#
television#shows#since#October#2005#(Pardo#2013).#This#innovation#has#shifted#the#
way#that#consumers#interact#with#technology:#“This#‘iPod/iPhone/ iPad#generation’#
#
13#
epitomizes#the#new#peer#group#of#users#whose#audiovisual#experience#is#based#on#
all#sorts#of#media#platforms#and#whose#profile#to#a#large#extent#mirrors#that#of#the#
cinema-going#public#and#those#who#play#videogames”#(Pardo#2013).#As#the#Internet#
is#readily#available#to#consumers#and#smart#devices#are#common#household#items,#
these#new#technologically#driven#users#interact#with#entertainment#in#a#more#
efficient#way.#Marketing#experts#have#deduced#that#numerically#this#generation#of#
users#has#reached#a#critical#mass,#and#their#consumer#practices#contrast#those#of#
previous#generations#(Pardo#2013).#With#the#prevalence#of#cord#cutters,#cord#
nevers,#and#a#generation#of#Apple#users,#Johnson#and#Pardo#view#changes#in#
distribution#as#a#response#to#growing#demand#for#digital#platforms#for#online#
television#viewing.##
#
Newer!Players!in!the!Distribution!Market!
Currently,#the#leaders#of#online#content# distribution#include#Netflix#and#Hulu.##
Netflix,#established#in#1999,#has#evolved#from#a#mail#order#DVD#rental#company#to#
an#online#streaming#service#(Johnson#2014).#Competing#with#Blockbuster,#it#allowed#
consumers#to#conveniently#rent#movies#from#the#comfort#of#their#own#home#
through#the#Internet.#By#2007,#Netflix#revolutionized#distribution#by#employing#a#
Watch#Instantly#feature#that#allows#audiences#to#play#select#movies#and#shows#
immediately#on#their#computers.#Their#online#streaming#feature#has#elevated#their#
business#significantly#and#has#become#their#major#source#of#revenue,#serving#more#
than#40#million#subscribers#(Johnson#2014).#For#a#fixed#subscription#price#of#$7.99#
per#month,#consumers#can#have#access#to#unlimited#online#streaming#as#well#as#DVD#
#
14#
rentals.#With#rapid#success#and#growth#over#a#relatively#short#timespan,#the#
company#has#begun#producing#its#own#original#content#including#“House#of#Cards”#
and#“Orange#is#the#New#Black”.#The#success#of#Netflix#and#online#streaming#has#been#
met#by#competition.#In#2008#Hulu#emerged#into#the#online#distribution#market.#
Similarly#to#Netflix,#Hulu#streams#television#and#films#through#an#online#platform#
and#offers#a#subscription#for#Hulu#Plus#at#the#same#price#of#$7.99#per#month.#
Currently#owned#by#major#television#conglomerates#including#Comcast,#21
st
#Century#
Fox#Corporation,#and#the#Walt#Disney#Company,#it#is#the#principal#digital#distributor#
of#network#television#(Johnson#2014).##
#
Shortcomings!in!the!Literature!
Johnson#examines#the#emergence#of#online-based#distributors#through#their#
ability#to#act#as#direct#competitors#of#traditional#multichannel#video#programming#
distributors,#or#“MVPD”s.#In#this#sense,#she#focuses#on#the#idea#of# virt u al#cable#
companies#who#can#provide#the#same#channels#and#content#as#traditional#cable#
companies.#By#doing#so,#she#argues#that#MVPDs#have#made#it#impossible#for#these#
virtual#cable#companies#to#exist#because#of#anticompetitive#behavior#such#as#illegal#
deals#with#content#programmers#that#prevent#others#from#accessing#content#or#
manipulation#of#prices#to#discourage#MVPD#subscribers#from#cancelling.#While#this#
is#a#valid#point,#this#thesis#emphasizes#the#influence#that#innovation#has#on#changing#
the#market#as#a#whole#and#finds#an#emphasis#on#the#idea#of#an#online#cable#company#
to#be#somewhat#limiting#in#researching#and#determining#the#effects#that#online#
distribution#has#on#the#existing#market#and#cable#companies.#Johnson’s#focus#on#the#
#
15#
inability#of#virtual#cable#companies#to#emerge#doesn’t#fully#take#the#idea#of#shifting#
consumer#patterns#and#preferences#into#account.##
Online#platforms#don’t#necessarily#need#to#provide#identical#services#as#cable#
and#satellite#companies#in#order#to#be#successful,#as#Evens#echoes.#During#times#of#
digitization#and#technological#advancement,#there#is#great#opportunity#for#
innovation#to#be#more#fruitful#than#replication.#An#example#supporting#this#point#is#
the#physical#DVD#rental#business.#In#the#following#analogy,#Blockbuster#can#be#
equated#to#cable#and#satellite#television#companies,#and#Netflix’s#original#business#
model#of#online#rental#of#physical#DVDs#can#be#equated#to#online#cable#companies#
that#Johnson#mentions.#While#Netflix#put#Blockbuster#out#of#business#because#it#
offered#the#same#service#in#a#more#convenient#way,#Netflix’s#old#business#of#DVD#
rentals#needed#to#go#a#step#further#into#streaming#to#fully#satisfy#consumer#trends.#
This#instance#of#innovation#shows#that#perfect#substitutes,#or#replication,#such#as#
online#physical#rental#services#may#not#be#as#effective#as#an#alternate#form#of#
competition#that#responds#to#consumer#needs.#Streaming#is#an#alternative#to#renting#
films,#which#has#become#a#more#popular#choice#in#the#past#few#years;#moreover,#
streaming#and#online#distribution#of#content#do#not#necessarily#need#to#follow#cable#
and#satellite#television#models#in#order#to#do#well#in#the#market.#One#may#argue#that#
cable#and#satellite#offer#more#channels#and#commercialized#content#that#others#may#
not#have#access#to,#but#it#is#important#to#note#that#Netflix#and#Hulu#offer#a#wide#
selection#of#popular#programming#from#major#media#companies#such#as#NBC#
Universal#and#ABC#Television#as#well#as#indie#films,#niche#content#often#overlooked#
by#cable#companies,#and#original#content.#At#a#significantly#lower#price#point#for#
#
16#
unlimited#access#to#thousands#of#titles,#these#digital#distributors#have#been#major#
contributors#to#the#cord#never#and#cord#cutter#phenomenon.###
# Additionally,#literature#on#the#influence#of#Netflix#and#Hulu#on#cable#
companies#has#yet#to#define#or#examine#a#clear#relationship#between#the#newer#
companies’#growth#and#the#effects#that#they#are#having#on#cable#and#satellite#
companies.#While#Netflix#and#Hulu#were#able#to#use#technology#to#break#into#the#
distribution#industry#and#compete#with#these#MVPD,#what#exactly#is#the#impact#that#
they#are#having#on#the#major#cable#and#satellite#conglomerates?#To#what#extent#have#
they#disrupted#the#oligopoly#and#where#do#they#stand#in#the#market?#As#mentioned#
earlier,#in#an#oligopolistic#industry,#conglomerates#are#forced#to#respond#to#price#
changes#among#rivals#to#remain#competitive.#Hulu’s#and#Netflix’s#prices#are#$7.99,#so#
how#is#this#impacting#cable#companies#whose#prices#remain#about#eight#times#
higher?#What#kind#of#variables#and#data#are#helpful#in#assessing#the#impact?#The#
following#data#sections#and#data#analysis#will#examine#aspects#of#distribution#
including#consumer#habits#and#trends,#prices,#and#revenue#to#observe#a#relationship#
that#can#address#existing#questions#and#holes#in#the#study.###
#
#
!
!
!
!
!
!
!
!
!
!
!
!
#
17#
Data!and!variables!!!
!
!
!
!
##
In#the#literature#review,#the#authors#characterized#certain#subsets#of#
consumers#as#being#cord#cutters,#cord#nevers,#and#the#Apple#Generation.#Figure#1#
uses#2015#data#from#Deloitte#to#show#the#different#age#groups#of#television#
consumers,#indicating#the#percentage#of#each#age#group#that#streams#monthly.#Data#
reveals#that#among#younger#television#viewers,#there#is#a#higher#percentage#of#
individuals#who#stream#monthly.#The#older#the#audience#members#are,#the#smaller#
the#percentage#of#people#in#their#age#groups#who#stream#television#monthly.#This#
makes#sense#intuitively#because#younger#generations#tend#to#adapt#to#newer#
technology#at#a#faster#rate#and#have#an#easier#time#changing#their#habits#
accordingly.#A#14-year#old#cord#never#will#have#a#smoother#transition#following#
distribution#trends#than#a#40-year#old#consumer#who#has#been#watching#cable#
#
18#
television#for#decades.#While#the#trend#in#the#data#shows#a#pattern#of#decreasing#
percentages#of#streamers#as#consumers#get#older,#there#is#a#noticeably#sharper#
decrease#between#those#who#are#32-48#years#old#and#consumers#who#are#68#and#
older.#However,#there#is#only#a#12%#difference#between#the#percentage#of#14#to#48#
year#olds#who#stream#monthly.#According#to#the#data#72%#of#14-25#year-old#
television#viewers#utilize#online#streaming#compared#to#the#23%#of#people#68#and#
older.#Overall,#53%#of#consumers#of#all#ages#stream#television#programs#monthly,#
indicating#that#streaming#on#average#has#been#embraced#by#more#than#half#of#
individuals#in#all#age#groups.##
#
#
#
As#mentioned#earlier,#Netflix’s#and#Hulu’s#online#distribution#services#
emerged#around#2007,#rivaling#more#established#distributors#such#as#Comcast#and#
Time#Warner#Cable.#These#companies#are#relatively#new,#which#is#why#their#yearly#
revenue#is#an#important#factor#in#understanding#their#expansion#into#this#market.#
#
19#
Rather#than#looking#at#their#revenue#in#comparison#to#those#of#the#major#cable#and#
satellite#companies,#it#is#better#to#analyze#individual#changes#in#revenue#from#year#
to#year#to#determine#how#quickly#the#companies#are#growing.#Hulu’s#financial#
information#is#not#easily#accessible,#so#the#revenue#I#obtained#comes#from#Statista.#
Statista’s#research#analysts#collect#their#data#through#resources#within#the#industry.#
I#also#looked#into#Netflix’s#annual#10-K#financial#reports#from#2007#to#2014#to#
collect#its#revenue.#Overall,#the#revenue#for#both#companies#points#to#a#significant#
yearly#growth#rate,#which#is#depicted#in#Figure#2.#Data#suggests#that#Netflix’s#
revenue#has#increased#4.57#times#over#the#span#of#seven#years#from#$1,205,340,000#
to#$5,504,656.#Hulu’s#revenue#in#2013#is#50#times#higher#than#its#revenue#in#2007,#
increasing#from#$20,000,000#to#$1,000,000,000.#These#growth#rates#indicate#
significant#momentum#in#the#current#online#distribution#market.##
#
#
#
#
20#
In#2014,#approximately#87%#of#U.S.#households#subscribed#to#either#cable#or#
satellite#television#(Experian#2014).#Physical#televisions# a re#typically#good#
indicators#of#satellite#or#cable#use,#so#the#number#of#television#households#in#the#U.S.#
can#support#this#statistic#and#illustrate#the#prevalence#of#these#forms#of#distribution#
over#the#past#decade#or#so.#Collected#on#Statista,#Figure#3#shows#this#data#from#2000#
to#2016.#The#number#of#television#households#dramatically#increased#from#the#year#
2000#to#2010;#however,#from#2010#to#2012-2013#there#was#a#noticeable#decline#in#
the#number#of#TV#households.#The#data#indicates#that#although#the#number#reaches#
a#low#point#by#2012-2013,#the#number#of#TV#households#picks#back#up,#but#at#a#slow#
rate#that#barely#surpasses#the#2010#mark.#Online#streaming#became#available#
around#2007,#which#could#potentially#explain#the#disruption#in#the#graph#and#
decrease#in#TV#households#from#2010#as#streaming#began#picking#up#in#popularity.#
Nevertheless,#the#increase#in#popularity#and#revenue#of#Netflix#and#Hulu#throughout#
the#following#years#are#not#quite#consistent#with#the#increase#in#television#
households#following#2012.#The#ownership#of#televisions#and#the#use#of#Netflix#and#
Hulu,#however,#are#not#mutually#exclusive.#The#number#of#television#households#
does#not#have#any#causational#relationship#wit h# satellite#and#cable#usage,#but#can#
show#a#relationship#of#correlation.#The#inconsistency#of#Netflix # and#Hulu’s#growth#in#
revenue#and#increase#in#household#televisions#can# su ggest#that#perhaps#consumers#
have#decided#to#use#both#modes#of#distribution#to#watch#TV#shows#and#films#or#that#
rather#than#solely#using#their#laptops,#computers,#and#smart#devices#to#watch#Netflix#
or#Hulu,#cord#cutters#and#cord#nevers#prefer#to#use#their#television#monitors#to#
project#content#from#Netflix#or#Hulu.##
#
21#
#
The#number#of#U.S.#households#with#computers#also#is#an#important#variable#
in#understanding#how#digitized#distribution#has#been#able#to#enter#the#market#and#
compete#with#cable#and#satellite.#According#to#the#U.S.#Census#Bureau,#
approximately#78%#of#U.S.#households#had#high-speed#Internet#connection#in#2013#
(U.S.#Census#Bureau#2013).#Consumers#must#have#access#to#the#Internet#in#order#for#
online#streaming#to#become#a#widespread#trend,#and#the#most#common#form#of#
Internet#usage#is#through#computer#ownership.#In#a#span#of#twelve#years,#there#has#
been#a#30%#increase#in#households#who#own#computers,#with#84%#of#households#
having#at#least#one#computer#by#the#year#2013.##In#2010#there#is#a#noticeable#
decrease#in#the#percentage#of#households#with#computers,#which#is#a#similar#trend#
to#the#brief#decline#in#the#number#of#TV#households#mentioned#in#Figure#3.#This#is#
interesting#to#note#because#it#indicates#a#dip#in#computer#and#television#ownership#
during#the#same#time#period,#which#perhaps#points#to#external#factors#that#
decreased#the#consumption#of#different#electronic#goods.#Nevertheless,#the#data#in#
#
22#
Figure#4#shows#a#clear#overall#increase#in#computer#ownership#in#the#U.S.#This#
implicitly#indicates#that#Internet#usage#has#increased,#providing#a#platform#for#Hulu#
and#Netflix#to#continue#growing.##
#
#
#
Online#distribution#has#been#competitive#within#the#market#because#of#its#
relatively#low#prices.#Consumers#can#have#unlimited#streaming#options#on#Hulu#or#
Netflix#for#a#monthly#price#of#$7.99,#which#is#an#attractive#deal#considering#cable#and#
satellite#television#prices#are#significantly#higher#than#both#prices#combined.#
Average#monthly#cable#television#prices#are#important#to#note#because#they#have#
grown#exorbitantly#over#the#years.#Figure#5#shows#data#reported#by#the#Federal#
Communications#Commission#in#2013,#revealing#average#cable#television#monthly#
subscription#prices#from#1995#to#2013.#The#data#associated#with#the#figure#shows#
that#there#has#been#a#$42#increase#in#monthly#cable#prices#during#this#time#period.#
#
23#
Cable#and#satellite#television#have#been#major#sources#of#entertainment#for#decades#
as#there#have#been#few#other#distribution#options#within#the#market#until#recently.#
Figure#5#shows#that#average#monthly#prices#of#cable#television#were#over#three#
times#more#expensive#in#2013#than#in#1995.#Like#most#oligopolies,#cable#distribution#
companies#have#relatively#similar#prices#that#are#interdependent#on#one#another.#
Increasing#prices#of#cable#will#be#important#to#keep#in#mind#when#looking#at#
revenue.#Is#Time#Warner#Cable’s#revenue#increasing#at#a#similar#rate#as#growing#
cable#prices,#or#is#its#inability#to#lower#prices#to#rival#that#of#Netflix#and#Hulu#
influencing#its#revenue?#As#stated#with#the#other#variables,#there#are#outside#factors#
that#contribute#to#the#dramatic#increase#in#price.#For#example,#there#might#be#more#
channels#and#bundles#available#that#have#increased#the#value#of#cable#television#over#
time.#Another#example#may#be#that#prices#of#raw#materials#have#increased#or#the#
purchasing#of#new#technology#to#manufacture#cable#boxes#has#elevated#production#
costs#for#cable#companies,#pushing#them#to#increase#prices#accordingly.#There#are#
myriads#of#explanations#that#can#contribute#to#the#rising#prices;#nevertheless,#it#
most#likely#still#affects#consumers’#decisions#to#pay#when#they#have#the#option#of#
lower#and#consistent#prices#through#Netflix#and#Hulu#subscriptions.##
#
Comcast#and#Time#Warner#Cable#are#the#two#dominating#cable#
conglomerates#in#the#distribution#realm,#which#is#why#trends#in#their#yearly#revenue#
are#representative#of#how#the#cable#industry#as#a#whole#is#doing.#These#distributors#
have#functions#that#go#beyond#video#cable#services#and#extend#to#Internet,#
telephone,#and#other#services;#furthermore,#it#is#a#mistake#to#merely#look#at#their#
overall#revenue#because#it#doesn’t#accurately#depict#how#their#cable#television#
#
24#
business#is#doing.#I#chose#not#to#analyze#Comcast#because#data#on#its#business#is#too#
intertwined#to#that#of#NBC#Universal.#The#revenue#reported#in#its#annual#financial#
reports#combine#services#of#their#core#business#as#well#as#revenue#from#its#theme#
parks,#studios,#and#cable#channels.#This#makes#it#very#difficult#to#distinguish#how#
much#of#the#revenue#is#coming#from#cable,#Internet#and#phone#services,#or#from#NBC#
Universal.#Instead,#I#examined#Time#Warner#Cable’s#annual#10-K#financial#reports#
from#2006-2014#and#found#data#that#is#broken#down#to#provide# sp ecific#revenue#for#
their#video#cable#services.#
#
#
#
#Figure#6#shows#Time#Warner#Cable’s#revenue#during#this#time#period.#In#
2006,#its#revenue#spiked#by#approximately#$3#billion#and#peaked#in#2010.##From#
2007#to#2008#there#was#a#brief#dip#in#revenue.#While# t here#are#several#factors#that#
may#have#influenced#this#decrease#such#as#the#financial#crisis,#it#is#worth#considering#
#
25#
that#Netflix#launched#its#streaming#services#that#year.#Following#2007,#Time#Warner#
Cable’s#video#revenue#stays#consistent#and#lacks#significant#growth.#In#fact,#from#
2012#to#2014#there#is#an#overall#plunge#in#revenue.#Given#that#cable#prices#have#
risen#noticeably,#it#is#interesting#that#Time#Warner#Cable’s#revenue#doesn’t#increase#
at#a#similar#rate.#Perhaps#this#points#to#a#loss#of#consumers#who#are#willing#to#pay#
higher#prices.#The#trends#in#revenue#from#2007#to#2014#provide#a#noteworthy#
contrast#to#its#revenue#growth#from#2006-2007.#If#there#have#been#significant#
external#economic#factors#influencing#the#loss#of#revenue,#they#would#have#most#
likely#also#affected#Netflix#and#Hulu’s#revenue#and#growth#rates#as#well.#Figure#2’s#
data#showing#substantial#growth#in#Netflix ’ s#and#Hulu’s#yearly#revenue#over#this#
same#time#period#indicates#a#correlation#between#online#streaming#and#an#overall#
decrease#in#revenue#growth#in#television#cable#services.##
#
#
Conclusion! #
#
The#television#distribution#market#has#been#affected#greatly#by#Netflix#and#
Hulu.##There#are#various#viewpoints#expressing #how#the#oligopolistic#nature#of#the#
industry#is#shifting#as#a#result#of#newer#technology,#but#the#majority#of#the#literature#
on#this#topic#concludes#that#online#platforms#are#necessary#to#satisfy#consumer#
needs#and#have#allowed#smaller,#newer#companies#to#compete#with#larger#cable#and#
satellite#conglomerates.#My#analysis#illustrates#that#current#consumer#trends#and#
changes#in#companies’#revenues#point#at#a#relationship#where#on l ine#distribution#
and#lower#subscription#prices#shift#revenue#away#from#older#conglomerates#such#as#
#
26#
Time#Warner#Cable#to#newer#ones#including#Netflix#and#Hulu.#Furthermore,#the#
oligopolistic#structure#of#the#market#has#been#disrupted#as#a#result#of#technology,#
which#has#removed#major#barriers#that#once#prevented#smaller#companies#from#
succeeding#and#surviving#in#this#industry.##
This#thesis#took#a#particularly#close#look#at#the#economic#theory#of#oligopoly.#
To#find#a#relationship#between#the#distribution#realm#and#the#major#firms#that#
dominate#the#market,#I#researched#the#entrance#barriers#that#have#been#prevalent#in#
the#industry#as#well#as#costs#and#other#limitations#that#have#shaped#the#oligopolistic#
structure.#Consolidation#among#content#creators#and#distributors#have#enforced#an#
unequal#power#dynamic#among#larger#and#smaller#firms#for#decades;#moreover,#
content#creators#and#providers#have#engaged#in#anticompetitive#behavior#that#has#
made#it#nearly#impossible#for#a#newer#or#smaller#company#to#participate#in#
distribution.#Technology,#however,#has#been#able#to#alleviate#some#of#these#
obstacles.##
Additionally,#my#thesis#looks#at#a#breakdown#of#television#consumption#
habits#that#have#changed#as#a#result#of#technology.#Consumer#behavior#and#trends#
are#integral#in#understanding#why#Hulu#and#Netflix#have#been#able#to#compete#
against#dominant#cable#and#satellite#television#companies.#In#my#data#I#found#that#
the#number#of#televisions#per#household#has#steadily#been#increasing#over#the#past#
decade,#but#the#increase#has#been#at#a#lower#rater#over#the#past#few#years.#American#
households#have#also#been#increasing#their#consumption#of#computers,#with#
approximately#84%#of#households#owning#computers#in#2013.#As#prices#of#monthly#
cable#subscription#escalated#by#about#$20#from#2007#to#2013#and#continue#rising,#it#
#
27#
is#not#surprising#that#Time#Warner#Cable’s#revenue#has#decreased#over#this#time#
period#as#Netflix#and#Hulu#provide#compelling#alternatives.##
The#data#points#to#relationships#among#the#variables#that#support#the#central#
argument#of#this#thesis,#but#there#were#some#limitations#present.#Unfortunately,#
industry#data#is#hard#to#collect#because#much#of#it#is#private.#Similarly,#it#is#difficult#
to#collect#information#specific#to#television#and#video#services#because#major#
conglomerates#such#as#Comcast#report#their#data#all#together#or#lump#them#into#
categories#that#make#it#hard#to#find#specific#cable#television#statistics#or#revue.#My#
analysis#of#the#industry#could#have#been#deeper#if#these#numbers#were#more#
accessible.#Additionally,#the#changes#in#online#distribution#have#occurred#primarily#
since#2007.#This#relatively#short#time#frame#gives#my#study#a#limited#number#of#
observations#and#data#points#to#look#at,#which#is#why#running#a#regression#and#
creating#a#model#is#a#particularly#challenging#task#for#this#topic.#Each#year#over#this#
time#period,#there#have#been#changes#in#technology#and#developments#in#online#
distribution#that#are#hard#to#account#for#in# t he#data.#Nevertheless,#this#restraint#
concerning#timeframe#is#what#makes#this#topic#worth#studying#because#changes#in#
the#industry#are#occurring#so#rapidly.#In#every#industry,#the#vast#modifications#and#
advances#in#technology#are#inevitably#going#to#impose#this#sort#of#data#limitation,#
but#at#the#same#time#mark#progress#and#growth.#In#the#entertainment#world,#there#
has#been#tremendous#year-to-year#innovation#that#continues#improving#the#way#
films#and#television#can#be#consumed.#While#it#is#something#that#has#been#shifting#
the#structure#of#the#market,#it#is#benefitting#consumers#by#making#it#easier#and#
cheaper#for#them#to#access#and#watch#television.#My#exploration#of#digitalization#of#
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28#
distribution#provides#valuable#analysis#that # contributes#to#a#discussion#of#the#
changes#in#the#entertainment#industry,#but#also#speaks#to#a#bigger#issue:#As#
technology#continues#to#advance#in#every#industry,#it#is#uncertain#how#it#may#
interact#with#and#potentially#disrupt#many#oligopoly-dominated#sectors#of#our#
economy.##
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References#
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