Is online TV streaming about to displace traditional TV viewing? If yes, what consequences could we expect?
Recent data from media and communications analytical firm SNL Kagan shows Pay TV is losing customers for the first time ever, with subscribers dropping down from 100.4 million in Q1 2010, to 100.1 million in Q2. While it’s still too early to pinpoint the real reason for this decline, the growing ease with which viewers can access traditional cable and satellite content on their computers is raising two key issues that the TV industry needs to resolve, says IESE Business School Professor of Information Systems Josep Valor, who also teaches the Advanced Digital Media Strategies program at IESE's Institute for Media and Entertainment.
One of these issues is emission rights. Restricting access to content by blocking IP addresses as a way to protect and manage broadcasting rights worldwide (wherever those rights are sold) is fast-becoming inefficient. This is because more and more services, such as “TV to PC” or Internet “proxy” services, allow users to mask their IP addresses and access cable and satellite content online, no matter where they’re located. This means content owners would likely need to forgo “territorial exclusivity” in their contracts and start negotiating some sort of revenue-sharing agreement with these new “channels” as a way to cope, says Prof. Valor.
Another potential issue is the challenge to net neutrality. Prof. Valor believes that the enormous growth in Web traffic could lead to a battle for bandwidth, especially in countries where bandwidth is limited and many networks still rely on copper infrastructure to transmit data. If this scenario makes customers and companies willing to pay more just to ensure smoother and faster access to their chosen content — e.g., the streaming of live events — it could open the door for telecom companies to demand more “control” and to “discriminate” over which and what type of content they prioritize on their pipelines. This would especially allow them to set more profitable bandwidth-pricing schemes.
Read more about Prof. Valor’s analysis here.
The cable television industry may be in for a makeover, whether it likes it or not. One possible role model could be Apple Inc., notes a February 2010 article from The Wall Street Journal. Here’s why:
Currently, TV networks provide shows and channels to cable operators for a fee. Cable operators then bundle the content together as part of a cable TV package, and recoup their expenses from consumer subscriptions and in some cases advertising.
The problem is, consumers aren’t happy paying for packages that include shows on networks they don’t really watch or even want in the first place. In fact, media research firm Nielsen estimates that in 2008, households only viewed 18 channels on average, out of the 130 that come with their cable TV subscription.
Likewise, the Internet is a growing threat to the cable television industry’s current distribution model. Not only can viewers now watch shows for free or at a low cost online and on web-enabled devices, but the ubiquity of the Internet could also increase the risk for pirated shows, especially as consumers look for cheaper alternatives.
One possible solution, notes The Wall Street Journal, is for cable operators to ditch their role as content middleman and to simply focus on selling access to their pipes, allowing TV networks to then sell content directly to consumers. This, notes the paper, is similar to how Apple Inc.’s new e-book store for the iPad (dubbed “iBooks”) operates — by acting as a storefront (or a dumb pipe) for publishers to sell their books, in exchange for a fee.
To read the full Wall Street Journal article, click here.
Are cable and satellite TV firms in danger of “disintermediation?”
In economics, “disintermediation” refers to “the removal of intermediaries in the supply chain” — which some critics believe could be cable programming’s fate, as more and more users watch their favorite shows directly online, bypassing the cable and satellite TV companies. Indeed, how these companies will cope in today’s Web-centric market “is the single biggest question facing the media industry,” remarked former News Corp. President and COO Peter Chernin, at the USC Annenberg School for Communications’ roundtable discussion last Fall.
The End? Maybe, But Not Yet
For now, however, cable companies appear to be in good shape. According to a September 2009 report by marketing and media research firm Nielsen, time spent watching TV is up four minutes from the prior TV season, and up 20 percent from 10 years ago — partly because of the increased choice in cable and broadcast content.
And as El Segundo-based satellite TV company DirecTV has shown, it’s still possible for non-broadcast firms to maintain subscriber growth. DirecTV reported 136,000 new U.S. subscribers for the 3rd quarter of 2009, bringing its total base to 18.4 million, with the average monthly revenue per subscriber rising 2.1 percent, says Dow Jones NewsWires.
Cable and satellite companies may still have to watch their backs, however. As video content grows online, so does the online audience. Research firm comScore reports that Web-viewing again reached record-breaking levels this past September, with 168 million users in the U.S. watching videos via Web-based services like YouTube and Hulu.
What’s more, the proliferation of products and services that support the “online viewing” model may continue to threaten cable’s role — such as Internet-ready HDTVs and Blu-ray players, Internet “set-top boxes” like Apple TV and Boxee, “video- and Web-ready” game consoles like XBox 360 and Playstation 3, and pay-per-download/subscription-based services like Amazon on Demand, Netflix, or Apple’s planned iTunes TV.
Salvation = Content Control?
So what can cable operators do to protect their programming revenues and remain relevant? One strategy, it seems, is to take “control” of how their content is accessed online. Time Warner and Comcast, for example, have partnered on an initiative to make their cable programming available online for free — but only to their own paying cable subscribers. Called “TV Everywhere” for Time Warner and “On Demand Online” for Comcast, the initiative is expected to launch by the first part of 2010.
And as we have written about in a previous post on the Comcast-NBCU merger, when Comcast completes its deal to a 51 percent stake in media and entertainment firm NBC Universal, this could give Comcast an even bigger say on how and when TV shows are distributed online — which, incidentally, could also raise anti-trust concerns. "Comcast/NBC would control so much important content that it could charge competitors more for its programs," writes Free Press, an independent advocacy group for media reform.
As for the Bottomline?
For now, there are still more questions than answers as cable firms and other players in the media chain find their footing in the changing digital landscape. Since producing and distributing content costs money if users watch shows online for free, how can cable operators recoup costs of licensed and distributed content, and turn a profit? Will advertising dollars be enough, or will companies like Time Warner/Comcast eventually resort to charging consumers even more for their cable subscriptions, to subsidize their “free” online content? Will content providers, like Disney, for example, break away from cable firms and make their content available on services like Apple’s planned iTunes TV? If yes, who will go first? And from a technical standpoint, can the Internet really handle the huge need for increased bandwidth that will occur if there is a potential mass migration of viewers from TV to online?
Steve Jobs famously referred to the Apple TV — Apple’s “set-top box,” which allows viewers to play digital content from their computers on their TV sets — as a “hobby.” Why? “A lot of people have tried and failed to make [the “set-top box”] a business,” says the Apple CEO, at the 2007 AllThingsD conference in California. “It’s a business that’s hundreds of thousands of units per year, but it hasn’t crested to be millions of units per year. But I think if we improve things we can crack that.”
Well, Apple is now apparently trying to “crack that,” using the same strategy it used to sell millions of iPods and iPhones — “software” before “hardware.” In other words, offering an impressive range of content first, and hardware sales will follow.
The tech giant is currently on a mission to convince TV networks to make their shows available on iTunes, Apple’s software-based online digital media store, reports All Things Digital’s Peter Kafka. These TV shows would be part of a $30-a-month subscription service planned for sometime next year. And while Apple is not pushing to make the service exclusive on Apple TV, the service could still potentially boost sales of Apple’s beleaguered set-top box. That is, if Apple’s plan succeeds.
Who’s likely to bite?
Consumers who download or stream shows online, for one. According to research firm comScore, a record-breaking 168 million users in the U.S. watched videos via Web-based services like YouTube and Hulu this past September. And while it’s easy to find free content, the theory is: viewers who want to be assured of watching their favorite shows in good quality might not mind paying a minimal fee — especially if it beats the steep price of a cable subscription, which often includes bundled-in shows that are of little interest to many viewers.
“With it being so easy to get the things they want for free online, why should consumers be obliged to spend $90 a month for 500 channels, 490 of them that are never, ever watched?” writes LA Times’ BrandX blogger, Richard Metzger. “Paying just $30 for the things you do want to watch is a no-brainer. You won't need the DVR either, saving you an additional $12 a month.”
What’s more, Apple already has a built-in market it could target — the more than 100 million users who already have iTunes accounts.
Content providers looking for additional sources of revenue may also be interested in Apple’s proposition. Interested but cautious, that is. “Cable networks, for instance, don't want to threaten existing relationships and subscription fees from cable providers like Comcast,” says Kafka. “And programmers are also worried about the effect a subscription service would have on advertising revenue: Even if the service didn't distribute TV programs until after their initial air date, that could cut into ratings, which now measure viewership over the course of several days.”
Who will get bitten?
As mentioned, cable companies who depend on paid subscriptions may be threatened, if Apple comes out with a cheaper “unbundled” alternative that allows viewers to “buy” only the networks and shows they want, not a package of often “irrelevant” programming. But other players in the digital media chain may also find themselves on the losing end — such as brick-and-mortar retailers who sell DVRs and DVDs, and rent DVDs (like Blockbuster).
"The challenge is: Why do you need to have a physical retailer in the midst of a transaction between the content owner and the ultimate consumer?" Colin McGranahan, analyst at investment research firm Sanford C. Bernstein & Co, tells The Los Angeles Times.
Still more to chew on, however:
Even if Apple succeeds in getting consumers and content providers to bite, the company may still have other potential hurdles to face, such as, how to efficiently deliver video that will take up increasing Internet bandwidth. “Streaming your nightly TV is going to take lots of bandwidth, something broadband providers like cable and DSL companies are trying to limit, not open up,” writes Dan Moren, associate editor at MacWorld.com. To some extent, Apple’s success may rely on the very people they’re trying to disintermediate, the cable companies who control the “pipe” to the customers.
Apple also may need to make sure iTunes TV syncs properly with other systems and devices. A recent iTunes update that allowed users to connect their iTunes library to their Apple TV 3.0 box has led to synchronization glitches for PalmPre users, for example. “Apple has screwed some of its iTunes users,” writes tech reporter Mark Everett Hall in TGDaily.com. That kind of negative feedback can hurt Apple’s credibility and sales.
And of course, Apple would still have to fend off competition from similar subscription-based services, such as Amazon’s Video on Demand, Internet-ready HDTVs and Blu-ray players, Roku’s Netflix player, and game consoles like XBox 360 and Playstation 3, which now allow users to stream Netflix movies and TV shows, says PCWorld.
