I like football a lot. I like analytics a lot. Through some kind of not quite transitive property, I like football analytics a lot too.
But I'm so sick of seeing debate/criticism on Twitter of Pro Football Focus, who seem to constantly occupy a spot at the nexus of football analytics arguments.
What's weird is it's not the typical analytics arguments between guys yelling about 'guts' and guys yelling about data and which one is better. It seems a bit different, just pairing data-literate people against each other to argue over which stats mean something and which don't.
Pro Football Focus, from my vantage point, seems to provide a pretty valuable service.
They have a team of employees who watch the games and track all kinds of metrics. They focus on adding more detail and specificity on things that conventional stats on ESPN don't get it. That's a valuable service - and can be tremendously insightful.
They also publish player grades - which is the result of a detailed film review to score what each player did. The grades are the result of multiple reviewers, so it's not just one person, but the team collectively evaluates how all the players did, publishing results afterwards.
That's a less valuable service, doesn't mean it isn't insightful also, but it's less valuable than all the raw data. But since it takes a very complicated evaluation and boils it down to a simple positive or negative number, that's what people focus on.
These grades, as you can imagine, are often the source of Twitter feuds between PFF defenders and detractors. Those who say the grades are bullshit vs. those who say the numbers are valid.
I'm so sick of seeing these go back and forth on my timeline. Both sides are wrong.
The folks that hate on PFF argue that the grades are bullshit, and there are certainly cases where that's true. The fundamental flaw of their grading system is that, to be truly accurate, you need to know what a player was supposed to do, not just what they did. That means their grades are inherently subjective because they're guessing. In most cases, they're probably right, but not always. But with that said, are they probably pretty close to the right answer? Yeah. It's what we'd call 'directionally correct' in the consulting world. I'm sure any individual play could be off because you don't know a player's true assignment, but over the course of a game, a season, those mistakes should wash out. So if you're arguing over PFF's credibility on an individual grade, I'd say settle down, because on balance the ratings should be mostly right.
At the same time - PFF seems to get pretty damn smug about their system when someone criticizes it, and that's pretty stupid too.
This article notes the CEO of PFF remarking that criticism of player grading because of lack of visibility into assigned responsibility is lazy. I think that's wrong. It's not lazy to point out a methodological weakness. If you want to say the results are still valid on the whole - that's one thing - but let's not pretend your system is infallible.
I also hate that PFF constantly promotes the fact that 19 NFL teams subscribe to their services, because I think it leaves out a massive part of that equation. PFF uses the fact that NFL teams are subscribers to demonstrate the validity of their model and the value of their data. But the true indicator of your product's value isn't how many teams 'subscribe,' it's how much those teams pay for the subscription.
Anyone who has done business with a data service in any role knows that the service is always going to try and get you hooked on their platform with access at a low initial price. If I were running PFF, I would've tried to break into the league with an extremely low price to become the established platform for detailed game metrics - to become ubiquitous - and then focus on increasing the price/expanding to NCAA. It's not a complicated strategy.
So PFF brags about all the teams using their data. But unless we know how much they're paying, that evidence doesn't persuade me. However, I'm sure that it works on a lot of folks - and ultimately that's what you need to build a market standard platform.
I still think their data is probably pretty good and valuable for teams - even if there are some concerns around their grades. I wonder why a company like STATS, who pretty much owns the NBA's advanced analytics data source, hasn't grabbed them or launched a competitor. The barrier to entry seems pretty low (just find some football nuts who want to grade film - which STATS definitely already has).
What's more interesting to me isn't which platform becomes the standard for pro team offices, it's beyond that. Ultimately, sports wagering will be legal in the US. Whether it be restricted to Daily Fantasy or not, the walls will eventually come down. And at that point, the ability to offer proprietary data for sports analysis becomes much more valuable - because there will be much more real money riding on the outcomes. Bloomberg, Capital IQ, and other services like that are the analogs - and I'd have to think that the ultimate market for sports betting users (talking power users here, the ones who claim to win tons and tons in DFS), would be potentially significant.
I think that end game is where companies like PFF should be focused - not defending their grades on Twitter. After all, in that world, bets made based on their grades would ultimately speak for themselves and finally settle the question.
Friday, October 30, 2015
Saturday, September 12, 2015
Thoughts on Daily Fantasy - DraftKings, FanDuel, and the Rest
I tried to think of a narrative thread to organize some of the thoughts I've had around daily fantasy sports, but there didn't seem to be one and since blogging is now reduced to only possible when the baby is napping, I figured stream of consciousness is better than no consciousness at all.
If you're any kind of football fan, it has been wholly impossible to escape the constant barrage of advertisements for the exploding world of daily fantasy sports. Enabled by technology and loose regulation, daily fantasy is already one of those things you keep seeing articles about because of all the interest in it as a new source of revenue. It's also the next step in evolution of fantasy sports, a medium which was already taking too much of our collective time, but is now quicker and much more focused on immediate gratification than its stodgier parent - season-long fantasy. There's a point about our culture in there, but there's no time to discuss it.
Whereas season-long fantasy sports require you to draft a roster and manage it throughout an entire sports season, daily fantasy is exactly as its name describes, over and done with in a day. You draft a team immediately, and play them immediately, and get results immediately...then you start over from scratch. It takes the emotional attachment of managing a team for months to creating new team after new team after new team, throwing the old away once the day's games are complete. Tinder, but for fantasy sports.
And as the launch of the NFL season hits (which has to be the biggest fantasy sport on the planet), all daily fantasy companies are desperately trying to lock in the largest share of players - many of whom are just discovering the format.
I'm one of those players, and if my experience is any indication, these companies (DraftKings and Fanduel are the most prominent) are really effective at finding me and blasting the crap out of me with ads. I've seen tons of commercials on TV, I've seen promoted tweets, I've heard live reads on multiple podcasts. I've also seen multiple billboards, ads on the sides of buses, and even ads on the loading screen on my Roku box.
The only choice I had to make was which of the hundreds of referral codes I used to sign up.
But as I'm starting an experiment with DFS (that's what the people in the know call daily fantasy), a bunch of thoughts have run through my head:
This reminds me, almost exactly, of the online poker boom of the early 2000's - It's eerie in its resemblance. Most new DFS players are probably too young to remember the poker boom, which was probably around 2002-2003, when everyone and their mother was signing up to play online poker. Enabled by technology, new players flocked to try and make some money on sites that advertised the crap out of themselves -- because when you're a gambling institution, all you need is customers and you're guaranteed to make a profit. Sound familiar? I wonder if DraftKings just went and hired all the folks that used to work for online poker companies in the US
It's exactly like the poker boom, except one small difference - DFS companies, taking a page out of the Uber playbook, has done a couple things to prevent the US government from pulling the plug on them (technically, its allowed in most of the country because it's a 'fantasy sports game' and technically classified as a 'game of skill' rather than a 'game of chance'). Now DFS may be temporarily classified as a game of skill, but there's no reason the government can't change it up as they see fit, or go after payment processors as they did with poker back in the day. But DFS is going with a two-pronged approach...the first is, 'get so big so fast that the government can't shut you down' which is textbook Uber. If you reach such a critical mass, then any move to ban you will be met with a ton of consumer resistance (look at DeBlasio's recent 180 on Uber in NYC as an example of how this works in practice). However, this might not be as effective as in Uber's case, as the consumer base is much smaller and under the umbrella of 'sin'. That's why DFS' second prong is all the more important - they've aligned themselves with the professional sports leagues just about as tightly as they can. The leagues have invested in these companies, teams now are sponsored by DFS providers, major media has integrated themselves via investment and partnerships (Good luck trying to read an ESPN fantasy article without it touching on DraftKings). All this makes it harder and harder for government to pull the brakes (note: that doesn't mean they can't tax the crap of out them).
If DFS grows like the companies want it to, why wouldn't they get taken to the woodshed by the tax man - Assume the DFS market gets so big that government decides they can't possibly stop it. That would be great, except 'sin taxes' are still largely OK in most people's view, and often the only type of tax that can get support from legislators and a majority of voters. No one really complains when cities/states raise taxes on cigarettes (except smokers, which few people even openly admit to)...and where gambling is legalized, you see it getting it's shit taxed to the hilt in many cases (because running a gambling operation, as I said, is a license to print money if you can get people in the door). Some might argue that this would limit the financial payouts of DFS companies and make the games worse, but I don't think that's true...because...
Barriers to Entry do not exist - There's nothing to stop me, you, or anyone else from opening a DFS company. My default fantasy league is in Yahoo, and when I did my draft this week you know what I got, an advertisement to play in Yahoo's DFS game. There is really nothing to stop anyone from jumping into the pool, as far as I'm aware, I don't think there's a license required to use a sports league's name/stats. That's another element from the Online Poker boom, where sites exploded so fast all trying to grab as many players as possible, because without players you have no prize pool and no company. That's why we're seeing so much marketing now, and why we'll keep seeing it as long as DFS is permitted. There's very negligible differentiation between DFS companies -- game formats are similar, game structures/payouts are similar, I'd bet the interfaces and payment processes are similar...but signing up for an account and depositing money makes a subscriber relatively sticky...so without any real differentiation, you need to grab as much of the land rush as possible...and here we are.
That legislation is BS, DFS are games of luck - Don't let anyone tell you differently because they're probably selling you something, but to call DFS a 'game of skill' seems pretty laughable. If someone wants to show me where the skill is, I'd love to see it, but I don't think it's significantly more/less skill than betting on games against the spread. Many of these sites advertise large competitions for big payouts (like $1M), and in these formats, everyone drafts a team and enters the pool, and the best lineup wins the prize. I looked at that format for about two seconds to realize that you'd need to pursue a high-variance strategy to have any prayer of winning in such a large pool. And you know what that's like? It's exactly like your NCAA March Madness pool. If you want to tell me that winning an NCAA pool is a game of skill, I'll laugh my ass off.
I also think it's impossible to argue there's skill involved in DFS other formats (at least when it comes to football). We'll test this theory, I'm going to give it a shot this year and see how it goes...but there's no way DFS could be anywhere close to something like poker in terms of skill vs. luck. The primary reason I feel that way comes back to variance. If you play online poker, you can play thousands and thousands of hands, and over that time, your results are going to calibrate based on your overall skill level. You can play thousands and thousands of times a day. If you're playing DFS for NFL football, there's a couple different ways variance works against you. In the first place, there are only 17 weeks of the season. So we'll evaluate your skill over 17 weeks vs. thousands of poker hands...do you think there's still going to be a lot of variance in how you do over 17 observations? And as a second point, in poker, there's absolutely no variance in terms of how the cards perform. An Ace is always an Ace. A flush always beats two pair. This is concrete and probabilistic. In fantasy football, your Ace might turn out to be a six. Your two might be a King. Your flush might lose to two pair, because there are tons of additional variables that impact the outcome. There's never a chance the King of Spades tears his ACL and doesn't appear on the flop.
So you have exponentially fewer observations in DFS vs. poker, and you have tremendous variance in the value of game pieces in DFS vs. poker. And you want to tell me winning at this is skill??? I'm willing to hear arguments to the contrary, but I don't buy it.
Having said that, I'm still excited to try it - I hope I prove myself wrong. And if you do want to play - use my referral link. Haha, another classic from the poker boom.
If you're any kind of football fan, it has been wholly impossible to escape the constant barrage of advertisements for the exploding world of daily fantasy sports. Enabled by technology and loose regulation, daily fantasy is already one of those things you keep seeing articles about because of all the interest in it as a new source of revenue. It's also the next step in evolution of fantasy sports, a medium which was already taking too much of our collective time, but is now quicker and much more focused on immediate gratification than its stodgier parent - season-long fantasy. There's a point about our culture in there, but there's no time to discuss it.
Whereas season-long fantasy sports require you to draft a roster and manage it throughout an entire sports season, daily fantasy is exactly as its name describes, over and done with in a day. You draft a team immediately, and play them immediately, and get results immediately...then you start over from scratch. It takes the emotional attachment of managing a team for months to creating new team after new team after new team, throwing the old away once the day's games are complete. Tinder, but for fantasy sports.
And as the launch of the NFL season hits (which has to be the biggest fantasy sport on the planet), all daily fantasy companies are desperately trying to lock in the largest share of players - many of whom are just discovering the format.
I'm one of those players, and if my experience is any indication, these companies (DraftKings and Fanduel are the most prominent) are really effective at finding me and blasting the crap out of me with ads. I've seen tons of commercials on TV, I've seen promoted tweets, I've heard live reads on multiple podcasts. I've also seen multiple billboards, ads on the sides of buses, and even ads on the loading screen on my Roku box.
The only choice I had to make was which of the hundreds of referral codes I used to sign up.
But as I'm starting an experiment with DFS (that's what the people in the know call daily fantasy), a bunch of thoughts have run through my head:
This reminds me, almost exactly, of the online poker boom of the early 2000's - It's eerie in its resemblance. Most new DFS players are probably too young to remember the poker boom, which was probably around 2002-2003, when everyone and their mother was signing up to play online poker. Enabled by technology, new players flocked to try and make some money on sites that advertised the crap out of themselves -- because when you're a gambling institution, all you need is customers and you're guaranteed to make a profit. Sound familiar? I wonder if DraftKings just went and hired all the folks that used to work for online poker companies in the US
It's exactly like the poker boom, except one small difference - DFS companies, taking a page out of the Uber playbook, has done a couple things to prevent the US government from pulling the plug on them (technically, its allowed in most of the country because it's a 'fantasy sports game' and technically classified as a 'game of skill' rather than a 'game of chance'). Now DFS may be temporarily classified as a game of skill, but there's no reason the government can't change it up as they see fit, or go after payment processors as they did with poker back in the day. But DFS is going with a two-pronged approach...the first is, 'get so big so fast that the government can't shut you down' which is textbook Uber. If you reach such a critical mass, then any move to ban you will be met with a ton of consumer resistance (look at DeBlasio's recent 180 on Uber in NYC as an example of how this works in practice). However, this might not be as effective as in Uber's case, as the consumer base is much smaller and under the umbrella of 'sin'. That's why DFS' second prong is all the more important - they've aligned themselves with the professional sports leagues just about as tightly as they can. The leagues have invested in these companies, teams now are sponsored by DFS providers, major media has integrated themselves via investment and partnerships (Good luck trying to read an ESPN fantasy article without it touching on DraftKings). All this makes it harder and harder for government to pull the brakes (note: that doesn't mean they can't tax the crap of out them).
If DFS grows like the companies want it to, why wouldn't they get taken to the woodshed by the tax man - Assume the DFS market gets so big that government decides they can't possibly stop it. That would be great, except 'sin taxes' are still largely OK in most people's view, and often the only type of tax that can get support from legislators and a majority of voters. No one really complains when cities/states raise taxes on cigarettes (except smokers, which few people even openly admit to)...and where gambling is legalized, you see it getting it's shit taxed to the hilt in many cases (because running a gambling operation, as I said, is a license to print money if you can get people in the door). Some might argue that this would limit the financial payouts of DFS companies and make the games worse, but I don't think that's true...because...
Barriers to Entry do not exist - There's nothing to stop me, you, or anyone else from opening a DFS company. My default fantasy league is in Yahoo, and when I did my draft this week you know what I got, an advertisement to play in Yahoo's DFS game. There is really nothing to stop anyone from jumping into the pool, as far as I'm aware, I don't think there's a license required to use a sports league's name/stats. That's another element from the Online Poker boom, where sites exploded so fast all trying to grab as many players as possible, because without players you have no prize pool and no company. That's why we're seeing so much marketing now, and why we'll keep seeing it as long as DFS is permitted. There's very negligible differentiation between DFS companies -- game formats are similar, game structures/payouts are similar, I'd bet the interfaces and payment processes are similar...but signing up for an account and depositing money makes a subscriber relatively sticky...so without any real differentiation, you need to grab as much of the land rush as possible...and here we are.
That legislation is BS, DFS are games of luck - Don't let anyone tell you differently because they're probably selling you something, but to call DFS a 'game of skill' seems pretty laughable. If someone wants to show me where the skill is, I'd love to see it, but I don't think it's significantly more/less skill than betting on games against the spread. Many of these sites advertise large competitions for big payouts (like $1M), and in these formats, everyone drafts a team and enters the pool, and the best lineup wins the prize. I looked at that format for about two seconds to realize that you'd need to pursue a high-variance strategy to have any prayer of winning in such a large pool. And you know what that's like? It's exactly like your NCAA March Madness pool. If you want to tell me that winning an NCAA pool is a game of skill, I'll laugh my ass off.
I also think it's impossible to argue there's skill involved in DFS other formats (at least when it comes to football). We'll test this theory, I'm going to give it a shot this year and see how it goes...but there's no way DFS could be anywhere close to something like poker in terms of skill vs. luck. The primary reason I feel that way comes back to variance. If you play online poker, you can play thousands and thousands of hands, and over that time, your results are going to calibrate based on your overall skill level. You can play thousands and thousands of times a day. If you're playing DFS for NFL football, there's a couple different ways variance works against you. In the first place, there are only 17 weeks of the season. So we'll evaluate your skill over 17 weeks vs. thousands of poker hands...do you think there's still going to be a lot of variance in how you do over 17 observations? And as a second point, in poker, there's absolutely no variance in terms of how the cards perform. An Ace is always an Ace. A flush always beats two pair. This is concrete and probabilistic. In fantasy football, your Ace might turn out to be a six. Your two might be a King. Your flush might lose to two pair, because there are tons of additional variables that impact the outcome. There's never a chance the King of Spades tears his ACL and doesn't appear on the flop.
So you have exponentially fewer observations in DFS vs. poker, and you have tremendous variance in the value of game pieces in DFS vs. poker. And you want to tell me winning at this is skill??? I'm willing to hear arguments to the contrary, but I don't buy it.
Having said that, I'm still excited to try it - I hope I prove myself wrong. And if you do want to play - use my referral link. Haha, another classic from the poker boom.
Monday, August 17, 2015
Just a Reminder - Matt Barkley Does Not Have Trade Value
It was exciting to finally watch an Eagles game yesterday, even if it was only pre-season and even if I had to work real hard to figure out which guy was wearing which number.
With a solid performance from backup Matt Barkley - it may only be a matter of time before we start to hear talk radio rumblings about how the Eagles should trade their new surplus at QB. Given so many teams in the NFL are desperate for QBs - I'm sure folks will have visions of second day draft picks dancing in their heads from a team like the Jets or anyone else who sustains an injury.
I wanted to throw some cold water on that talk before it even gets started.
Let's set aside the debate over which QB, Barkley or Tim Tebow, that Chip Kelly would rather have on his roster behind Sam Bradford and Mark Sanchez. That's a whole different discussion - and a fun one - but one that's best left to WIP to debate for the next 4 weeks.
Let's assume that Kelly wants Tebow and as such, Barkley becomes expendable. It wouldn't be shocking (Barkley was a Roseman pick after all and hence, wears a secret scarlet letter that only Chip can see).
But if the Eagles wanted to move Barkley - what's the realistic return from another QB desperate team? Let's look at the data...
I went back and found all the QB trades from the last few years and focused on ones that were made after the draft but before the season got started. What QBs got traded in that period and what value was exchanged:
August 2014: Patriots trade Ryan Mallett to Texans for a conditional 6th/7th round draft pick in 2016
June 2014: Texans trade TJ Yates to Falcons for linebacker Akeem Dent
August 2012: Seahawks trade Tavaris Jackson to Bills for a 2013 7th round draft pick
July 2011: Eagles trade Kevin Kolb to Cardinals for a 2012 2nd round draft pick and DRC
July 2011: Redskins trade Donovan McNabb to Vikings for a 2012 6th round draft pick
September 2010: Vikings trade Sage Rosenfels (and another player) to Giants for a 7th round draft pick
August 2010: Ravens trade John Beck to Redskins for CB Doug Dutch
September 2009: Chiefs trade Tyler Thigpen to Dolphins for a 3rd round draft pick
September 2009: Buccaneers trade Luke McCown to Patriots for a 7th round draft pick
September 2009: Lions trade Kevin O'Connell to Jets for a 7th round draft pick
Those are the last ten QB trades from roughly this period in the NFL calendar. There's one clear outlier - the Eagles highway robbery of the Cardinals in the Kevin Kolb deal - but remember Kolb at least had the pedigree of a high draft pick and several years of Andy Reid tutelage. Just about all the other deals are for 6th or 7th round picks or fringe players.
While it only takes one desperate team to overvalue someone (the Chiefs got a third round pick for Tyler Thigpen? Crazy!) - let's temper our expectations on Matt Barkley's trade value. If the Eagles do decide to move him - don't expect more than a 7th round pick.
With a solid performance from backup Matt Barkley - it may only be a matter of time before we start to hear talk radio rumblings about how the Eagles should trade their new surplus at QB. Given so many teams in the NFL are desperate for QBs - I'm sure folks will have visions of second day draft picks dancing in their heads from a team like the Jets or anyone else who sustains an injury.
I wanted to throw some cold water on that talk before it even gets started.
Let's set aside the debate over which QB, Barkley or Tim Tebow, that Chip Kelly would rather have on his roster behind Sam Bradford and Mark Sanchez. That's a whole different discussion - and a fun one - but one that's best left to WIP to debate for the next 4 weeks.
Let's assume that Kelly wants Tebow and as such, Barkley becomes expendable. It wouldn't be shocking (Barkley was a Roseman pick after all and hence, wears a secret scarlet letter that only Chip can see).
But if the Eagles wanted to move Barkley - what's the realistic return from another QB desperate team? Let's look at the data...
I went back and found all the QB trades from the last few years and focused on ones that were made after the draft but before the season got started. What QBs got traded in that period and what value was exchanged:
August 2014: Patriots trade Ryan Mallett to Texans for a conditional 6th/7th round draft pick in 2016
June 2014: Texans trade TJ Yates to Falcons for linebacker Akeem Dent
August 2012: Seahawks trade Tavaris Jackson to Bills for a 2013 7th round draft pick
July 2011: Eagles trade Kevin Kolb to Cardinals for a 2012 2nd round draft pick and DRC
July 2011: Redskins trade Donovan McNabb to Vikings for a 2012 6th round draft pick
September 2010: Vikings trade Sage Rosenfels (and another player) to Giants for a 7th round draft pick
August 2010: Ravens trade John Beck to Redskins for CB Doug Dutch
September 2009: Chiefs trade Tyler Thigpen to Dolphins for a 3rd round draft pick
September 2009: Buccaneers trade Luke McCown to Patriots for a 7th round draft pick
September 2009: Lions trade Kevin O'Connell to Jets for a 7th round draft pick
Those are the last ten QB trades from roughly this period in the NFL calendar. There's one clear outlier - the Eagles highway robbery of the Cardinals in the Kevin Kolb deal - but remember Kolb at least had the pedigree of a high draft pick and several years of Andy Reid tutelage. Just about all the other deals are for 6th or 7th round picks or fringe players.
While it only takes one desperate team to overvalue someone (the Chiefs got a third round pick for Tyler Thigpen? Crazy!) - let's temper our expectations on Matt Barkley's trade value. If the Eagles do decide to move him - don't expect more than a 7th round pick.
Friday, July 17, 2015
ClassPass Model
One of the things I missed as a consultant was having a gym membership. One tough part about being on the road four days a week (apart from never seeing your family) was that the economics of a gym membership could never add up if you only had three days a week where you could actually visit it.
Even after leaving consulting, it still doesn't make economic sense - because I have a free substitute - a fitness center in our apartment building. It offers maybe 65% of the benefits of the gym, but while being as convenient as possible and free (or to get technical, baked into our rent costs).
But when I read about ClassPass - a new gym class startup, I was a little intrigued.
Their offer is a flat monthly fee, and you can book classes at any participating gyms/studios. They sign up dozens of studios (and fill their excess capacity) and you can take classes at them without formal signups or subscriptions. Customers pay a reduced fee than if they were to pay for individual classes (typically the gym gets around 50% of their typical rate)
I thought it might be interesting to use and sample different places in the area - until I realized that it's pretty much just for women. By that I mean, if you want to take yoga and barre classes - then its great. But there aren't a whole lot of dude-friendly workouts on there.
So it wasn't going to work for me...but I've continued to wonder if their model is going to work for their member gyms either...
I'm not so sure it will, and to me its because the challenge for gym owners is often at-odds with ClassPass' goal.
Gyms want to make money - and the best way for a gym to do that is through enlisting and maintaining subscribers. Subscribers provide a consistent revenue stream and they're relatively sticky (as opposed to transaction-based per-class customers).
But I'm not sure ClassPass exists to drive subscribers. ClassPass serves as a way to fill excess capacity in existing gym classes - but I'm 100% sure their primary goal is to enlist and maintain subscribers too. And that's where I think it may break down (or limit its upside).
The most immediate comparisons I can think of for ClassPass are Groupon, TKTS booths in NYC, and booking sites like Hotwire. All of those provide cheaper prices for excess capacity in restaurants, broadway shows, and hotels/cars.
But all of those companies supply base are transaction-oriented revenue, not subscription-oriented revenue.
For all those Groupon, TKTS, hotel transactions, the consumer gets a cheaper price, the end-supplier gets revenue that exceeds its extremely low marginal cost, and the middle-man gets a cut for connecting the two.
But now when you use ClassPass - the consumer gets to take a class at a reduced rate (good for consumer), the end-supplier gets some revenue that also exceeds its marginal cost, and the middle-man gets its cut. So what's the problem.
The end-supplier isn't in the business of selling every class out. They are in the business of finding and signing up subscribers.
Now, filling every class is, in a vacuum, good for a gym. But what's better is having a full class of subscribers that often don't show up. The ideal utilization rate for a gym is NOT 100%.
This would be OK is ClassPass was a good vehicle to drive subscribers. And this is certainly how ClassPass would pitch itself to any gym. But I'm curious to know the stats on it. Because ClassPass certainly doesn't want to lose subscribers, and I have a hard time believing most ClassPass subscribers want TWO different gym subscriptions.
There's also something of a risk to using ClassPass if you're a gym owner. Because you charge more on a per-class basis to your subscribers than you do to ClassPass users - you might end up taking some of your best customers (the ones that pay and never show up) and making them realize they'd save money using ClassPass. ClassPass limits you to taking 4 classes at any one gym in a given month - but I'll bet there are some regular gym members who pay normal fees for exactly that much usage.
To it's credit - ClassPass tries to manage this problem. The gyms can place a limit on how much space they allocate to ClassPassers, so it doesn't have to be a big number, but I still would have doubts that the service is the easiest way to boost subscribers. I do think it would do a great job of attracting the cheapest customers (ClassPass users who would never sign up for expensive memberships and are content to pick and choose across ClassPass gyms) - but these folks would never pay full fare.
I do think ClassPass would be a big benefit to new gyms, ones that are trying to get people in the door and build awareness. But I'm skeptical that the model is a long-term win for gyms - because I think when push comes to shove, ClassPass and their suppliers both want the same thing.
Even after leaving consulting, it still doesn't make economic sense - because I have a free substitute - a fitness center in our apartment building. It offers maybe 65% of the benefits of the gym, but while being as convenient as possible and free (or to get technical, baked into our rent costs).
But when I read about ClassPass - a new gym class startup, I was a little intrigued.
Their offer is a flat monthly fee, and you can book classes at any participating gyms/studios. They sign up dozens of studios (and fill their excess capacity) and you can take classes at them without formal signups or subscriptions. Customers pay a reduced fee than if they were to pay for individual classes (typically the gym gets around 50% of their typical rate)
I thought it might be interesting to use and sample different places in the area - until I realized that it's pretty much just for women. By that I mean, if you want to take yoga and barre classes - then its great. But there aren't a whole lot of dude-friendly workouts on there.
So it wasn't going to work for me...but I've continued to wonder if their model is going to work for their member gyms either...
I'm not so sure it will, and to me its because the challenge for gym owners is often at-odds with ClassPass' goal.
Gyms want to make money - and the best way for a gym to do that is through enlisting and maintaining subscribers. Subscribers provide a consistent revenue stream and they're relatively sticky (as opposed to transaction-based per-class customers).
But I'm not sure ClassPass exists to drive subscribers. ClassPass serves as a way to fill excess capacity in existing gym classes - but I'm 100% sure their primary goal is to enlist and maintain subscribers too. And that's where I think it may break down (or limit its upside).
The most immediate comparisons I can think of for ClassPass are Groupon, TKTS booths in NYC, and booking sites like Hotwire. All of those provide cheaper prices for excess capacity in restaurants, broadway shows, and hotels/cars.
But all of those companies supply base are transaction-oriented revenue, not subscription-oriented revenue.
For all those Groupon, TKTS, hotel transactions, the consumer gets a cheaper price, the end-supplier gets revenue that exceeds its extremely low marginal cost, and the middle-man gets a cut for connecting the two.
But now when you use ClassPass - the consumer gets to take a class at a reduced rate (good for consumer), the end-supplier gets some revenue that also exceeds its marginal cost, and the middle-man gets its cut. So what's the problem.
The end-supplier isn't in the business of selling every class out. They are in the business of finding and signing up subscribers.
Now, filling every class is, in a vacuum, good for a gym. But what's better is having a full class of subscribers that often don't show up. The ideal utilization rate for a gym is NOT 100%.
This would be OK is ClassPass was a good vehicle to drive subscribers. And this is certainly how ClassPass would pitch itself to any gym. But I'm curious to know the stats on it. Because ClassPass certainly doesn't want to lose subscribers, and I have a hard time believing most ClassPass subscribers want TWO different gym subscriptions.
There's also something of a risk to using ClassPass if you're a gym owner. Because you charge more on a per-class basis to your subscribers than you do to ClassPass users - you might end up taking some of your best customers (the ones that pay and never show up) and making them realize they'd save money using ClassPass. ClassPass limits you to taking 4 classes at any one gym in a given month - but I'll bet there are some regular gym members who pay normal fees for exactly that much usage.
To it's credit - ClassPass tries to manage this problem. The gyms can place a limit on how much space they allocate to ClassPassers, so it doesn't have to be a big number, but I still would have doubts that the service is the easiest way to boost subscribers. I do think it would do a great job of attracting the cheapest customers (ClassPass users who would never sign up for expensive memberships and are content to pick and choose across ClassPass gyms) - but these folks would never pay full fare.
I do think ClassPass would be a big benefit to new gyms, ones that are trying to get people in the door and build awareness. But I'm skeptical that the model is a long-term win for gyms - because I think when push comes to shove, ClassPass and their suppliers both want the same thing.
Tuesday, June 30, 2015
Why Do I Keep Seeing Fidelity on Every VC Deal?
I follow the news regarding startups and venture capital firms fairly closely - and lately I keep seeing something that confuses me. It's not the increasingly eye-popping valuation numbers, or the fact that every article is obsessed with declaring the next unicorn, but more often its who is in on these later rounds.
More frequently, it's not your typical VC firm, but a more traditional investment firm - one that you'd expect to see advertising on the Sunday morning news shows, not being mentioned in TechCrunch.
There have been articles on the trend - but I was particularly interested in Fidelity - who I think is doing it the most. I feel like every other day I read about Fidelity putting another bunch of capital into the later round of a 'unicorn'.
Crunchbase confirms that if they aren't the biggest recent VC investor, they've got to be pretty darn close.
June 28 - AirBnB -$1.5B round
June 25 - WeWork - $400M Series E
June 10 - PaxLabs - $47M Series C
June 9 - Blue Apron - $135M Series D
May 29 - Snapchat - $338M Series E
May 8 - Pintrest - $186M Series G
Now those totals are the whole round, not Fidelity's specific commitments, but that seems like a LOT of deals in a very short time span.
And I've been trying to wrap my mind around how/why they are putting out so much money so fast, in seemingly every big deal that gets announced.
The first argument would be that they're investing to generate a return. OK sure, but is that really possible?
I decided to do a little digging. One of the things that makes tracking Fidelity's VC investments difficult is that they operate so many different funds. When Fidelity announces an investment - it's not always in the same mutual fund bucket (which to me raises an interesting question as to how they allocate deals, but that's another subject altogether). I saw a reference to three primary funds for VC investments - the Contrafund, the Growth Company Fund, and the OTC Fund.
So I pulled all those funds most recent Holdings reports - which list all their investments as of May (so I missed out on some of the more recent deals).
I did a rough filter to try and ascertain how much VC exposure each of the funds had:
Contrafund ($112B total) - about 1.1% or $1.2B...largest investments are a 0.35% of the fund in Pintrest Series E and 0.14% of the fund in Uber Series D
Growth ($43B total) - about 1.7% or $740M...largest investments are in a 0.36% of the fund in Uber Series D and 0.2% of the fund in YourPeople Series C
OTC ($13B total) - about 2.1% or $280M...largest are a 0.56% in Uber Series D (that really got spread around) and 0.27% in AppNexus Series E
So we're talking about small concentrations here. All of these funds hold more of each of Apple, Facebook, Google, and Amazon than their entire VC portfolios.
So the argument that you need to invest here to get returns doesn't really seem necessarily true. Let's set aside the fact that these investments are in later rounds than average, which means there isn't as high a ceiling on some of these valuations. Let's assume the Fidelity VC portfolio in aggregate generates an average return (which is giving the Fidelity VC and mutual fund teams the benefit of the doubt and assuming they're as good as the average dedicated VC investor).
The average return on a VC portfolio over ten years is ~8%. So if we assume an 8% growth rate on the VC portfolio in those Fidelity funds, their collective $2.3B in investments will be worth $4.7B in ten years. That's essentially doubling your investment...and it moves the aggregate value of the overall Fidelity portfolio a little more than 1%. That's it.
These are for funds who average 12-13% returns over their lives, so I can't imagine these returns would really cut it (especially because I think we're dramatically overstating the potential gains).
Well, if it's not returns, is it just to ensure access? I saw a recent stat that the average time for a startup until its IPO has moved to 11 years. That's a long time. So there's a thought that if you aren't investing in these startups now, you're going to have a tougher time getting access to the stock when it goes public - if it even goes public at all.
I suppose you could make that point - but is it really so tough for these major institutional investors to get allocations when these stocks come up? I have zero banking background - so I honestly don't know.
My thought, is that its more a question of optics than returns. Differentiating your mutual fund from many others is difficult, and with increasing interest in low-cost index funds or ETFs - mutual funds need to push the envelope further and further to demonstrate their value add. (I'm asserting the point about inflows into low-cost mutual fund alternatives, I don't have the data, but I believe I've seen evidence of that). What's a great way to demonstrate the benefits of active management? How about including private company investments that index funds or smaller mutual fund companies literally CANNOT invest in??? Let's see Vanguard try to do that one.
It's a small investment for the Fidelity's of the world, like I said, it's ~1% of the portfolio. If it blows up, it's a blip on the radar. But for an investor making the marginal decision about which growth-targeted funds to invest in, the fact that you've got Pintrest in the portfolio might be enough to sway the decision.
Of course, what that means for the rest of the VC community (probably bad) and startups (probably great) has yet to be seen.
More frequently, it's not your typical VC firm, but a more traditional investment firm - one that you'd expect to see advertising on the Sunday morning news shows, not being mentioned in TechCrunch.
There have been articles on the trend - but I was particularly interested in Fidelity - who I think is doing it the most. I feel like every other day I read about Fidelity putting another bunch of capital into the later round of a 'unicorn'.
Crunchbase confirms that if they aren't the biggest recent VC investor, they've got to be pretty darn close.
June 28 - AirBnB -$1.5B round
June 25 - WeWork - $400M Series E
June 10 - PaxLabs - $47M Series C
June 9 - Blue Apron - $135M Series D
May 29 - Snapchat - $338M Series E
May 8 - Pintrest - $186M Series G
Now those totals are the whole round, not Fidelity's specific commitments, but that seems like a LOT of deals in a very short time span.
And I've been trying to wrap my mind around how/why they are putting out so much money so fast, in seemingly every big deal that gets announced.
The first argument would be that they're investing to generate a return. OK sure, but is that really possible?
I decided to do a little digging. One of the things that makes tracking Fidelity's VC investments difficult is that they operate so many different funds. When Fidelity announces an investment - it's not always in the same mutual fund bucket (which to me raises an interesting question as to how they allocate deals, but that's another subject altogether). I saw a reference to three primary funds for VC investments - the Contrafund, the Growth Company Fund, and the OTC Fund.
So I pulled all those funds most recent Holdings reports - which list all their investments as of May (so I missed out on some of the more recent deals).
I did a rough filter to try and ascertain how much VC exposure each of the funds had:
Contrafund ($112B total) - about 1.1% or $1.2B...largest investments are a 0.35% of the fund in Pintrest Series E and 0.14% of the fund in Uber Series D
Growth ($43B total) - about 1.7% or $740M...largest investments are in a 0.36% of the fund in Uber Series D and 0.2% of the fund in YourPeople Series C
OTC ($13B total) - about 2.1% or $280M...largest are a 0.56% in Uber Series D (that really got spread around) and 0.27% in AppNexus Series E
So we're talking about small concentrations here. All of these funds hold more of each of Apple, Facebook, Google, and Amazon than their entire VC portfolios.
So the argument that you need to invest here to get returns doesn't really seem necessarily true. Let's set aside the fact that these investments are in later rounds than average, which means there isn't as high a ceiling on some of these valuations. Let's assume the Fidelity VC portfolio in aggregate generates an average return (which is giving the Fidelity VC and mutual fund teams the benefit of the doubt and assuming they're as good as the average dedicated VC investor).
The average return on a VC portfolio over ten years is ~8%. So if we assume an 8% growth rate on the VC portfolio in those Fidelity funds, their collective $2.3B in investments will be worth $4.7B in ten years. That's essentially doubling your investment...and it moves the aggregate value of the overall Fidelity portfolio a little more than 1%. That's it.
These are for funds who average 12-13% returns over their lives, so I can't imagine these returns would really cut it (especially because I think we're dramatically overstating the potential gains).
Well, if it's not returns, is it just to ensure access? I saw a recent stat that the average time for a startup until its IPO has moved to 11 years. That's a long time. So there's a thought that if you aren't investing in these startups now, you're going to have a tougher time getting access to the stock when it goes public - if it even goes public at all.
I suppose you could make that point - but is it really so tough for these major institutional investors to get allocations when these stocks come up? I have zero banking background - so I honestly don't know.
My thought, is that its more a question of optics than returns. Differentiating your mutual fund from many others is difficult, and with increasing interest in low-cost index funds or ETFs - mutual funds need to push the envelope further and further to demonstrate their value add. (I'm asserting the point about inflows into low-cost mutual fund alternatives, I don't have the data, but I believe I've seen evidence of that). What's a great way to demonstrate the benefits of active management? How about including private company investments that index funds or smaller mutual fund companies literally CANNOT invest in??? Let's see Vanguard try to do that one.
It's a small investment for the Fidelity's of the world, like I said, it's ~1% of the portfolio. If it blows up, it's a blip on the radar. But for an investor making the marginal decision about which growth-targeted funds to invest in, the fact that you've got Pintrest in the portfolio might be enough to sway the decision.
Of course, what that means for the rest of the VC community (probably bad) and startups (probably great) has yet to be seen.
Monday, June 15, 2015
Things I Hope My Daughter Never Has to Do
Not going to lie - it's definitely a little weird to have a kid. Not weird in terms of what you have to do (dirty diapers are many things, but they aren't weird), but it's weird to have to be responsible for something. Like a houseplant, only you'll go to jail if you don't water it (and your wife will be PISSED).
But it's not all that complicated to take care of a baby - they don't have too many demands. So when you're sitting there feeding your infant daughter a bottle and she's happy - you get some time to think about random stuff.
So I started to wonder, what's going to be really different for my daughter when she gets to be an adult. She's six months old now, so in the next 17.5 years, how are things going to change?
On its face - its an absurd question. When I was born, I'm sure if you asked my parents what things would be like around the new century - they'd have no way of knowing even half of the things that I got to take advantage of. They definitely wouldn't have predicted cell phones or the internet - if they had, they'd be billionaires. So yeah, this exercise is laughably futile...but I did want to think of some things that might impact her life in a few years. And it's exciting to think about all the awesome things that I'd like and realize we might go WAY past that. (of course there's also the zombie apocalypse scenario, but let's set that aside)
Things I think my daughter won't have to deal with in 2032 (I'm going to be embarrassed if I have to read this in 2032)
- No cursive handwriting: This isn't that big a deal, but all that time in elementary school learning script, I'm guessing that'll go away considering no one really uses it anymore. Maybe schools don't even teach it now. The only thing I've had to write in cursive since I learned it was my signature, and that's already going away.
- No channel surfing: As a kid, I'll always remember turning on the TV, rotating through every single channel to find something to watch, then not finding anything, and going to a different TV in the house to see if that one had anything different. Kids today have no concept of this. Not only are there dynamic channel guides, but now you're really not beholden to any kind of TV schedule. Whatever you want, you can get through either VOD or services like Netflix. I don't think my daughter will ever know the experience of turning on the TV without a plan of what she's going to watch.
- No paying with cash: This should be a no-brainer. I'm already 90% of the way there in terms of getting rid of cash as a payment vehicle, and as cell phone payments get even more ubiquitous - cash is going to vanish except for stuff you want to keep hidden. So except for my daughter's illegal arms deals, I'm guessing she won't handle cash.
- No waiting in line: This one is a bit more ambitious, but I feel like by the time we hit 2032, we as a society should be way beyond waiting in lines. Grocery stores, drug stores, to the degree that these things still exist - we should be completely beyond waiting in line to pay for things. Sure, there's a chance that there will be some super advancements in RFID-like technology that enables you to just pick stuff up in stores and walk out with it, but I'm also betting that retailers will find ways to remove the human requirement from checking out at a front counter - you might just do it yourself, and so you won't need to wait for anyone to help you. (maybe this is more my fantasy than a real guess for the future)
- No driving a car: This is a big one, and one I'm desperately hoping our legal industry doesn't bury in 500 tons of lawsuits. It would be amazing if my daughter never had to learn how to drive a car. I'd probably still teach her (see aforementioned zombie scenario), but fully automated cars would be such an amazing life change for her, I really hope it comes to fruition. Automated cars would allow people to live without owning a car and allow cities to dump things like parking infrastructure and remove tons of traffic congestion (because your average driver is an idiot, and half of all drivers are bigger idiots than the average one). When I think about her future, I'm super excited about this one.
- Always-on connectivity: The ability to never ever ever ever be out of contact via cell phone. No gaps in coverage. No bad reception. Constant GPS tracking....Alright, so this one is mostly still for me.
The best part of even thinking about this is that I'm sure I'm not even scratching the surface of what's to come. Maybe there'll even be something to stave off the zombie apocalypse, I can certainly dream about that.
But it's not all that complicated to take care of a baby - they don't have too many demands. So when you're sitting there feeding your infant daughter a bottle and she's happy - you get some time to think about random stuff.
So I started to wonder, what's going to be really different for my daughter when she gets to be an adult. She's six months old now, so in the next 17.5 years, how are things going to change?
On its face - its an absurd question. When I was born, I'm sure if you asked my parents what things would be like around the new century - they'd have no way of knowing even half of the things that I got to take advantage of. They definitely wouldn't have predicted cell phones or the internet - if they had, they'd be billionaires. So yeah, this exercise is laughably futile...but I did want to think of some things that might impact her life in a few years. And it's exciting to think about all the awesome things that I'd like and realize we might go WAY past that. (of course there's also the zombie apocalypse scenario, but let's set that aside)
Things I think my daughter won't have to deal with in 2032 (I'm going to be embarrassed if I have to read this in 2032)
- No cursive handwriting: This isn't that big a deal, but all that time in elementary school learning script, I'm guessing that'll go away considering no one really uses it anymore. Maybe schools don't even teach it now. The only thing I've had to write in cursive since I learned it was my signature, and that's already going away.
- No channel surfing: As a kid, I'll always remember turning on the TV, rotating through every single channel to find something to watch, then not finding anything, and going to a different TV in the house to see if that one had anything different. Kids today have no concept of this. Not only are there dynamic channel guides, but now you're really not beholden to any kind of TV schedule. Whatever you want, you can get through either VOD or services like Netflix. I don't think my daughter will ever know the experience of turning on the TV without a plan of what she's going to watch.
- No paying with cash: This should be a no-brainer. I'm already 90% of the way there in terms of getting rid of cash as a payment vehicle, and as cell phone payments get even more ubiquitous - cash is going to vanish except for stuff you want to keep hidden. So except for my daughter's illegal arms deals, I'm guessing she won't handle cash.
- No waiting in line: This one is a bit more ambitious, but I feel like by the time we hit 2032, we as a society should be way beyond waiting in lines. Grocery stores, drug stores, to the degree that these things still exist - we should be completely beyond waiting in line to pay for things. Sure, there's a chance that there will be some super advancements in RFID-like technology that enables you to just pick stuff up in stores and walk out with it, but I'm also betting that retailers will find ways to remove the human requirement from checking out at a front counter - you might just do it yourself, and so you won't need to wait for anyone to help you. (maybe this is more my fantasy than a real guess for the future)
- No driving a car: This is a big one, and one I'm desperately hoping our legal industry doesn't bury in 500 tons of lawsuits. It would be amazing if my daughter never had to learn how to drive a car. I'd probably still teach her (see aforementioned zombie scenario), but fully automated cars would be such an amazing life change for her, I really hope it comes to fruition. Automated cars would allow people to live without owning a car and allow cities to dump things like parking infrastructure and remove tons of traffic congestion (because your average driver is an idiot, and half of all drivers are bigger idiots than the average one). When I think about her future, I'm super excited about this one.
- Always-on connectivity: The ability to never ever ever ever be out of contact via cell phone. No gaps in coverage. No bad reception. Constant GPS tracking....Alright, so this one is mostly still for me.
The best part of even thinking about this is that I'm sure I'm not even scratching the surface of what's to come. Maybe there'll even be something to stave off the zombie apocalypse, I can certainly dream about that.
Friday, April 17, 2015
Stop asking for cable TV unbundling
Every now and again, usually around some FCC hearing or cable system merger - I see a lot of articles or statements highlighting the fact that consumers should be able to pick and choose which channels they get through their cable providers.
Today, you don't have much choice in who your TV provider might be (because cable companies have area monopolies, and there are only a few satellite/phone company providers of video service), and within those choices you don't have a ton of flexibility as to what channels you can get.
Every provider will have a basic package (which is almost nothing), and a couple tiers of preferred packages that include all the channels you want and many that you don't.
Some consumers argue that this is unfair, and that they shouldn't be forced to buy a bundle of 50 channels when they only want a few. So these customers argue that unbundling will be good for them - because then they can pick and choose what to buy.
Unfortunately, for most consumers, this is dumb. It's dumb because consumers think this will lead to them paying less for cable - when I think it's the exact opposite that's the case.
While I don't doubt that there are some consumers out there who only watch one or two cable channels - I think the vast majority of subscribers casually watch a lot more TV networks than they think they do (surveys say consumers watch about 17 channels, but this is likely self-reported and I would guess, pretty low).
So these customers - to get the same experience they get today, would have to buy more channels than they expect.
In addition, cable companies would absolutely charge more for the channels everyone wants. It seems like there's this notion out there that once you unbundle TV packages cable companies are all of a sudden say, 'well - we'll just have to accept the fact that we'll make less money, because there's no way we can figure out how to price these channels'.
They'd figure it out. Hell, they've probably already done the analysis to figure out what they'd do to extract as much revenue as possible from an unbundled scenario.
I think you'd end up paying the same, only instead of 180+ channels (the current average), you'd only have ~20.
I think there's a very small subset of folks who actually watch almost nothing on TV - they might save some money. But for everyone else, they'd be far worse off.
The reason why this even came up today was that Verizon announced some bundling options that are closer to an unbundled world, and guess what, I think they'd make customers worse off while paying about the same as they do today.
Verizon would offer you a set of basic channels, including:
Local affiliates
Telemundo/Univision
AMC (at least you get Walking Dead)
Bloomberg
CNN
Food Network
HGTV
HSN
Hallmark
QVC
and some others
That's not exactly a murderer's row. Especially when you consider you can get your local feeds with an antenna for free.
But you also get two 'channel packs' with that. Each channel pack is basically a category pack. These include:
Lifestyle (e.g., Bravo, TLC, History)
Entertainment (e.g., TNT, TBS, USA, FX)
News/Info (e.g., Fox, MSNBC, CNBC)
Pop Culture (E!, MTV, Comedy Central)
Kids (e.g., Nickelodeon, Disney)
Sports (e.g., ESPN, Big Ten)
Sports PLUS (e.g., Regional Sports Network - so local teams, NFL Network)
The entry price for this unbundled option giving you more 'choice' of two channel packs - is $55 a month. Oh, and if you want the Sports Plus, you have to take the Sports and Sports Plus packs as your two choices (so god help you if you like sports AND have kids or an interest in News or anything else). Oh, and these prices probably don't include HD fees, and I'm sure it probably doesn't include DVR fees either.
If you want FOUR channel packs - again, without HD or DVR, it costs $75 a month.
So for $75 a month, you'll get about 80 channels. But today you probably pay around $75 a month for cable and get 180+ channels.
But now you get to choose! So it's good? Or something.
Long story short - people need to stop positioning 'unbundling' as a win for consumers. It's a win for a very select set of consumers - those that watch very little TV, but enough to want cable at some minimal level.
I'd love to actually meet one of these people - but frankly I doubt they really exist in any big magnitude.
What unbundling will do - is allow the cable companies to better price discriminate, and make more money off big consumers, while offering a minimal solution to hold onto cord-cutters.
But we all get to choose our channels - so I guess freedom from tyranny yay?
Today, you don't have much choice in who your TV provider might be (because cable companies have area monopolies, and there are only a few satellite/phone company providers of video service), and within those choices you don't have a ton of flexibility as to what channels you can get.
Every provider will have a basic package (which is almost nothing), and a couple tiers of preferred packages that include all the channels you want and many that you don't.
Some consumers argue that this is unfair, and that they shouldn't be forced to buy a bundle of 50 channels when they only want a few. So these customers argue that unbundling will be good for them - because then they can pick and choose what to buy.
Unfortunately, for most consumers, this is dumb. It's dumb because consumers think this will lead to them paying less for cable - when I think it's the exact opposite that's the case.
While I don't doubt that there are some consumers out there who only watch one or two cable channels - I think the vast majority of subscribers casually watch a lot more TV networks than they think they do (surveys say consumers watch about 17 channels, but this is likely self-reported and I would guess, pretty low).
So these customers - to get the same experience they get today, would have to buy more channels than they expect.
In addition, cable companies would absolutely charge more for the channels everyone wants. It seems like there's this notion out there that once you unbundle TV packages cable companies are all of a sudden say, 'well - we'll just have to accept the fact that we'll make less money, because there's no way we can figure out how to price these channels'.
They'd figure it out. Hell, they've probably already done the analysis to figure out what they'd do to extract as much revenue as possible from an unbundled scenario.
I think you'd end up paying the same, only instead of 180+ channels (the current average), you'd only have ~20.
I think there's a very small subset of folks who actually watch almost nothing on TV - they might save some money. But for everyone else, they'd be far worse off.
The reason why this even came up today was that Verizon announced some bundling options that are closer to an unbundled world, and guess what, I think they'd make customers worse off while paying about the same as they do today.
Verizon would offer you a set of basic channels, including:
Local affiliates
Telemundo/Univision
AMC (at least you get Walking Dead)
Bloomberg
CNN
Food Network
HGTV
HSN
Hallmark
QVC
and some others
That's not exactly a murderer's row. Especially when you consider you can get your local feeds with an antenna for free.
But you also get two 'channel packs' with that. Each channel pack is basically a category pack. These include:
Lifestyle (e.g., Bravo, TLC, History)
Entertainment (e.g., TNT, TBS, USA, FX)
News/Info (e.g., Fox, MSNBC, CNBC)
Pop Culture (E!, MTV, Comedy Central)
Kids (e.g., Nickelodeon, Disney)
Sports (e.g., ESPN, Big Ten)
Sports PLUS (e.g., Regional Sports Network - so local teams, NFL Network)
The entry price for this unbundled option giving you more 'choice' of two channel packs - is $55 a month. Oh, and if you want the Sports Plus, you have to take the Sports and Sports Plus packs as your two choices (so god help you if you like sports AND have kids or an interest in News or anything else). Oh, and these prices probably don't include HD fees, and I'm sure it probably doesn't include DVR fees either.
If you want FOUR channel packs - again, without HD or DVR, it costs $75 a month.
So for $75 a month, you'll get about 80 channels. But today you probably pay around $75 a month for cable and get 180+ channels.
But now you get to choose! So it's good? Or something.
Long story short - people need to stop positioning 'unbundling' as a win for consumers. It's a win for a very select set of consumers - those that watch very little TV, but enough to want cable at some minimal level.
I'd love to actually meet one of these people - but frankly I doubt they really exist in any big magnitude.
What unbundling will do - is allow the cable companies to better price discriminate, and make more money off big consumers, while offering a minimal solution to hold onto cord-cutters.
But we all get to choose our channels - so I guess freedom from tyranny yay?
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