In what's become a right of passage in the world of media and entertainment, Comcast's NBCUniversal will unveil Peacock, its new video streaming service, during the company's investor day Thursday in New York.
Peacock is the last of the known major media streaming services to officially "launch," joining Disney+, Apple TV+, HBO Max and Quibi as subscription video products that will compete or are now competing against Netflix, Amazon Prime Video, Hulu, CBS All Access and others.
Thursday's announcement will essentially close out phase one of the streaming era: product announcements and launch dates. Phase two will be figuring out how these services interact with each other and traditional bundled pay television.
Streaming services are theoretically future replacement products for pay TV — an anachronistic bundle of linear TV networks that cost somewhere between $60 and $100 per month. There's strong evidence suggesting the general public has begun a movement away from traditional TV toward streaming. About 80 million U.S. households still subscribe to some form of satellite or cable TV, down from a peak of close to 100 million roughly a decade ago, according to LightShed Partners, a technology, media and telecommunications research firm.
Then again, 80 million U.S. households is still a huge number. More Americans still subscribe to cable and satellite TV than Netflix, which has about 60 million subscribers, or any other streaming service.
The result makes this moment in time an awkward one for the innovation cycle. Disney, Amazon, AT&T, Comcast and Apple are among the largest companies laying the groundwork for a mass transition in media consumption, but their products also work as complements to traditional TV rather than replacements. Still, there's an assumption that streaming services will one day function as replacements, even if the end result is a bundle of streaming services that looks like a skinnier version of traditional TV with better user functionality that's available on all devices all over the world.
This pattern of innovation is fairly common, said Brian Hindo, a partner at strategy consulting firm Innosight, who works with media, technology and consumer clients. Innosight was co-founded by Clayton Christensen, author of the seminal business book "The Innovator's Dilemma," which details the typical effects of disruptive innovation.
Just as cellphones initially operated as complements to landline phones and mini mills were seen as niche manufacturing factories for low-quality steel, streaming services will be incomplete offerings until they reach scale, said Hindo.
"When disruptive products enter a market, they typically are worse in some meaningful way relative to traditional products," Hindo said. "Their appeal will initially be to certain segments of the market who are willing to accept trade-offs for new benefits."
At this juncture, the three new benefits for streaming services are lower price, new content and mobility, i.e., access to programming anywhere on any device. The drawbacks are lack of quality content, such as live sports, and a confusing array of options, rather than the one-bundle-fits-all approach of cable.
If streaming products can actually get to profitability — most of the major companies are predicting they will hit this point in three to five years — they will then be able to expand their reach and improve their offerings to accelerate the demise of cable TV, Hindo said.
Historically, publicly traded incumbents, such as Disney and NBCUniversal, have been poorly positioned to keep up with disruptors, said Hindo. They are too wedded to profitable models to purposefully innovate against themselves with niche products that come with disadvantages.
Then again, Disney and NBCUniversal know this. Their executives have likely read Christensen's book and other common business-school textbooks about how to properly pivot.
NBC's Peacock is perhaps the best example of traditional media's purgatory between innovative disruption and supplemental add-on. According to people familiar with the matter, NBC will announce an advertising-supported version of Peacock that's free to consumers but light on content, pairing it with a limited ad version for about $5 per month and an ad-free version that has Peacock's full offerings for about $10 per month. Comcast customers and, eventually, other pay-TV subscribers will get access to all of Peacock with limited ads for free. In essence, NBCUniversal, which is owned by Comcast, is giving away Peacock as a bonus to those who subscribe to traditional television.
Why is NBCUniversal doing this? First, Comcast is a traditional cable company that, all else equal, would like you to continue to buy cable TV. Second, NBCUniversal makes about $6 per month per subscriber for its basic cable networks, which include CNBC, MSNBC, USA, Bravo, E!, Golf Channel and others, according to research firm S&P Global. NBCUniversal makes even more on regional sports networks, of which they own nine, that can cost several dollars per month per subscriber.
That means new NBCUniversal CEO Jeff Shell stands to lose $7 to $9 per month for a given household that cuts the cord on cable. Simply swapping cable TV for Peacock, a product that's either free, $5 or $10, is probably going to be a money-losing proposition. Burke said last year he was targeting getting about $5 per month for every Peacock subscriber in advertising revenue. That's a great new revenue stream. It's not a great replacement revenue stream.
That may be fine and dandy for a start-up or a private company intent on pushing disruption. It's not so fine for a publicly traded company with a shareholder base and equity analysts making buy/hold/sell decisions on quarterly earnings results.
So Comcast CEO Brian Roberts and NBCUniversal chairman Steve Burke came up with a different plan: treat Peacock like an add-on service, not a replacement product. Disney, arguably Comcast's biggest rival, has leaned into the disruption by making Disney+ just $6.99 per month with a full catalog of old Disney, "Star Wars" and Marvel movies and TV shows. Yet even Disney hasn't made ESPN available outside of the traditional bundle, opting to keep the $9 per month per subscriber fees coming instead of accelerating the destruction of cable TV.
As I wrote here, AT&T has arguably been the most aggressive about putting together a kitchen sink streaming offering, HBO Max, that comprises much of the best stuff WarnerMedia has to offer. But while HBO Max may be the most robust streaming service as a replacement option for cable TV, it may actually be the least appealing complement for cable TV, at its relatively high price of $14.99 per month.
As a result, the winners of the streaming wars will go hand-in-hand with how quickly the traditional world of television unravels. Roberts and Burke have come to the conclusion that the transition from pay TV to streaming is best for NBCUniversal if that movement is as slow as possible. That may be the biggest "reveal" from Peacock's presentation in New York.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.