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With HBO and CBS Cutting the Cord, Which Networks Will Follow Suit?

With two swift strokes, HBO and CBS have opened new doors to a future where you won’t have to pay for a huge bundle of channels to get their TV shows.

Now the questions are which networks will follow suit — and how seriously the movement will threaten the highly profitable $80 billion pay-TV sector.

In an announcement that caught distributors unawares, HBO said it plans to roll out an over-the-top service domestically in 2015 that won’t require a pay-TV subscription — a precondition to receiving the network over its 42-year history. “This will be transformative for our company,” HBO CEO Richard Plepler said at Time Warner’s investor day confab last week. “It is time to remove all barriers to those who want HBO.”

While CBS is already available over the air for free, the broadcaster took the added step of launching All Access, a $5.99 monthly package stocked with 6,500-plus episodes from 15 current primetime series, previous seasons and older shows on-demand, plus live-streaming access to 14 of the Eye’s local stations. “We feel confident there’s a meaningful audience for it,” CBS Interactive president Jim Lanzone said.

If a growing number of nets create a la carte services and cut out the pay-TV middlemen, it’s bound to shrink the number of people willing to pay for a full package of channels. HBO’s stand-alone OTT service, aimed at the estimated 10 million broadband-only homes in the U.S., could have “broader implications for the (pay-TV) ecosystem, and impact Turner” by making traditional channel bundles less attractive, according to RBC Capital Markets analyst David Bank.

Plepler, while pegging HBO’s over-the-top opportunity in the hundreds of millions of dollars, downplayed the potential of the stand-alone service to cannibalize the existing business. He emphasized that HBO aims to market the product only to the cord-never crowd, and to work with cable and telco partners on the plan: “They’re going to make money,” he said.

Who’s next? Showtime, HBO’s longtime rival, is obviously a prime OTT candidate. CBS boss Leslie Moonves, at an investment conference last month, said there’s a “very strong possibility” Showtime could become available as a stand-alone broadband service. Following HBO’s announcement, Showtime would say only that it has been examining OTT “for some time,” and that the subscription model is “ideally positioned to take advantage of developing technologies in the consumer marketplace.”

Programmers already have been strategically shifting from cable TV to the Web. ESPN’s new nine-year deal with the NBA carves out rights for a future OTT streaming service with a selection of live games (no cable TV required). HBO launched a Netflix-like rival in the Nordics, and Starz is mulling an international SVOD service for Asia, Latin America and other territories.

Then, there’s Hulu — one of the original OTT players, owned by Disney, Comcast’s NBCUniversal and 21st Century Fox, which has more than 6 million subs for its $8-per-month Internet video service, featuring more than 100,000 TV episodes and 5,400 movies. But in that instance, content companies banded together to form a new brand rather than stand on their own.

Others could join the fray. Viacom should move sooner rather than later to launch its own OTT service, according to Guggenheim Partners analyst Michael Morris.

In his analysis, the entertainment company — suffering above-average ratings declines for its younger-skewing linear networks like MTV, Comedy Central and Nickelodeon — could introduce an ad-free SVOD package for $7.99 and an ad-supported one at $4.99 with episodes from its 25 cable networks and Paramount’s 3,400-film library, without damaging its core TV revenue stream.

“People (in the industry) think this is a dumb idea,” Morris said, because it would likely anger distributors and probably further depress linear network ratings. “But Viacom’s audience is eroding and they’re not benefitting from the bundle.”

Asked for comment, a Viacom rep said, “As our recent deals with Sony and Verizon (for virtual pay-TV services) attest, we’re aggressive in partnering with innovative distributors creating new pathways to audiences, and we’ll continue to create more opportunities as we pursue this strategy.” However, according to sources familiar with the media conglom’s strategy, it is not currently contemplating a direct-to-consumer OTT service in any real way.

It’s possible that content owners’ OTT services will remain on the fringes, mainly as a hedge against nascent cord-cutting. Today, Internet-video options aren’t a replacement for full-blown pay television, particularly when it comes to sports. For example, CBS’ SVOD package excludes all live NFL games. And notwithstanding ESPN’s OTT plans with the NBA, the sports TV giant has no desire to divorce its channels from subscription-based packages.

“I have a hard time believing we are going to see a mass unbundling of TV networks in the very near future,” Parks Associates analyst Glenn Hower said. “It’s possible we’re making moves toward that, but at the end of the day, networks still get a lot of money from the pay-TV system.”

For programmers, though, the danger is that without an OTT play they’ll be left behind as more people — particularly younger folk — opt out of pay TV.

“Strategically, the content owners will need to be there,” said Chris Vollmer, global managing director of digital for PwC’s Strategy& consulting arm. Otherwise, they “risk losing relationships and preference with a new generation of video consumers that are undeniably more digital-first.”

Brian Steinberg contributed to this report.

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