Execs at cable MSOs and satellite operators are looking over their shoulders at a worrisome trend: A small but growing number of subscribers are cutting their expensive links to multichannel content providers and turning instead to lower-cost Internet video. Others have even gone back to free over-the-air broadcasts, relying on rabbit ears or rooftop antennas.
Worse, Internet-savvy younger viewers — potential future subscribers — may opt to embrace online video delivery, also known as over-the-top, or OTT, content delivery, snubbing cable and satellite entirely.
To be sure, much the evidence for this is anecdotal. It seems everyone has a friend who got fed up at paying an ever-growing monthly cable bill and cut the service, or a kid who never watches TV and seems unlikely to ever buy one.
But facts are emerging that seem to confirm such a trend. According to a Nielsen report released earlier this month, the proportion of U.S. homes that rely on the Internet or on free broadcasts for their video consumption rose by almost 1 million — a rise of almost 22.8% — from the third quarter of 2010 to the third quarter of 2011.
This translates to 5.1 million broadband and aerial antenna homes that shun cable and satellite services, which Nielsen characterized as a “small but growing” number of consumers. The group represents less than 5% of all TV households.
Simply put, the number of cable homes dropped by more than a million. Receivers of video via telcos such as Verizon and AT&T rose by a quarter million, while satellite services gained 173,000 subs
Perhaps of even greater concern to the cable biz is a report released in June by research outfit Knowledge Networks (KN), which found that 15% of U.S. households rely solely on over-the-air signals — or 46 million individuals, up from 42 million the year before. The National Association of Broadccasters believes that KN’s numbers are more accurate than Nielsen’s, according to a spokesman for the org. KN does not address OTT viewing.
The fact remains that multichannel video service is a mature market. Households that want it already have it, and some TV execs worry that an increasing portion of the U.S. population may never want it.
Research company SNL Kagan projects that abstainers from cable, telco and DBS multichannel video will rise from about 4% of U.S. households at the end of 2011 to 10% by the end of 2015.
Granted, a few of these households don’t watch television. More of them are likely viewers who get their signals over the air. The mystery remains: How many of these non-subscribers are OTT video consumers?
“It’s certainly hard to count these households,” says Ian Olgeirson, SNL Kagan senior analyst. After all, there’s no verifiable subscriber base to look at. “These guys are sort of off the grid.” But, Olgeirson notes, common sense suggests that most people who substitute the Internet for traditional multichannel services tend to be young.
And there are significant differences in how youngsters and their elders use technology. For example, young people “don’t have landlines; they have cell phones,” observes Sam Craig, director of the Entertainment, Media and Technology Program at NYU’s Stern School of Business.
And although TV viewing has been traditionally driven by a desire to see a program when it’s first aired, says Craig, “among millennials, there’s less urgency.” They’re comfortable seeing a show on Hulu or Netflix weeks or months after it first airs, he says.
“Once people change their underlying behavior,” adds Craig, “it’s really hard to change it back.”
While that’s a thought to make MSOs shudder, it’s by no means clear what that changed underlying behavior was. Is the change in going entirely OTT, or is it simply time-shifting a show, or watching programs on other devices in addition to traditional TV sets?
What definitely has changed is the ability of people to watch video content away from the TV set in the den. Joe Ambeault, director of product management at Verizon’s FiOS TV, likens the old standard of appointment viewing to Henry Ford’s Model T offerings: You could have any color as long as it was black. “That paradigm started changing (for television) two or three years ago,” says Ambeault. Now, he says, consumers demand programs on the device of their choice in the location of their choice.
The traditional multichannel distribs have responded with various initiatives, including TV Everywhere and HBO Go. (TV Everywhere, a technology announced in 2009 by Comcast and Time Warner, allows TV content providers to stream their shows online for free to customers who get their Internet service via their cable company. HBO Go allows existing HBO subscribers to stream HBO programming to a variety of devices.)
But the companies offering these alternatives have not released enough data to judge their effectiveness. “At this point we can’t really quantify the success of the TV Everywhere efforts or the HBO Go effort,” says SNL Kagan’s Olgeirson.
Such programs are philosophically important to multichannel providers because they represent an expansion of the subscription umbrella, Olgeirson adds.
That’s also important to content creators who rely on the recurring revenues of the existing multichannel subscription model. “The folks who produce the vast majority of television programming in the country have a vested interest, we think, in maintaining the status quo,” says Michael Hodel, an equity analyst who tracks media companies at Morningstar.
While the efforts of Internet-based services to provide alternative content don’t figure to replace the traditional model in great numbers any time soon, a growing stable of programming can only increase fractionalization. YouTube is rolling out dedicated channels programmed by, among others, Madonna, Deepak Chopra and Shaquille O’Neal. Netflix has exclusive series in its pipeline, including a planned revival of TV’s critically acclaimed “Arrested Development.” Industry watchers expect Amazon.com and Apple to join the fray.
On Jan. 25, Netflix CEO Reed Hastings told investors and analysts that his company’s strategy is to “get along with everyone.” Similarly, says an industry source, YouTube wants to avoid an “us vs. them” confrontation with traditional media distribs.
Right now, these providers aren’t in a position to take on the multichannel powerhouses. One reason is the sheer size of that group. If you combine all the video streamed to consumers from Netflix, YouTube and other Internet-based services, says Ambeault, “that amount of traffic is a rounding error” on his FiOS service. And FiOS is far from the biggest multichannel distrib.
But it’s less a question of clout today than of long-term trends. Can OTT distribution make a major dent in the market share of traditional multichannel services over the long haul?
“Not with a $100 million budget,” says Neil Begley, senior VP in the corporate finance group at Moody’s Investors Service, referring to YouTube’s programming expenditures. Begley says that the Internet companies would have to spend multiple billions of dollars or compete for NFL rights for the incumbents to get nervous. He estimates that if Netflix sold streaming services to every U.S. TV household for $10 a month, it would generate about $11 billion in revenue, just over a third of the more than $30 billion multichannel distribs paid in 2010 just in carriage fees.
But with an increased emphasis on original content, Internet services may pose a different kind of threat. “We view them more as direct competitors for premium television services like an HBO or a Showtime more than as a direct competitor for the broad array of content that you get with a cable or a satellite television subscription,” says Morningstar’s Hodel.
Even so, distribs are taking no chances. FiOS offers cheaper packages (without sports, but including VOD) that might appeal to young people on a budget. And Comcast
is experimenting with plans that streams a full TV lineup over IP to students’ computers using college networks. With such bulk sales, the MSO hopes to establish its brand with the young audience.
Ultimately, some multichannel distribs are thinking that they may be able to sell customized subscriptions to individuals rather than households. With the proliferation of personal tablets and smartphones as well as the desire to have your video anywhere you want, the realization of that idea may not come too far in the future.
Should that happen, the U.S. video content market would surge from fewer than 100 million TV households to more than 300 million addressable individuals. And that could bring about a major upheaval in the way television does business.