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.
Two out of five UK Internet users would rather give up their TV than their Internet connection, says a recent survey by London-based research firm GfK NOP. Is it possible that eventually, with TV manufacturers’ upcoming and planned integrated web product enhancements, consumers may never have to choose?
Starting with the 2009 holiday season, companies like Sony, Samsung, LG, Panasonic and Vizio began to market their Web-enabled TV sets, which allow users to stream online content directly to their TVs, without having to connect to a computer or set-top box. The price tag? From $850 (for LG’s 42LH50 LCD TV), and up.
Randy Waynick, SVP at Sony's Consumer Group, predicted to USA Today, "When we all open up the newspapers on Jan. 1, and they talk about the hot items from the holiday selling season, Internet-connected TVs are going to be at the top of the list."
Of course, the dream to marry Web and TV has been around since more than a decade ago, when Microsoft purchased MSN TV (formerly WebTV Networks, a system that allows TV sets to connect to the Internet). The idea, however, finally seems to be gaining traction. In fact, iSuppli, a market research firm specializing in the electronics value chain, predicts that by 2013, worldwide retail sales of Internet-enabled TVs (IETVs) will reach 87.6 million units, compared with 14.7 million in 2009.
So can IETVs really go mainstream? It’s possible, but for now, there’s still a lot to improve on. Most IETVs in the market are not yet Bluetooth- or WiFi-equipped. They use a wired, Ethernet connection so consumers can’t easily connect wirelessly. Also, users cannot surf the Web freely with these TVs, and can only access content through a limited selection of “widgets,” or tiny on-screen buttons representing software apps. Samsung IETV sets, for example, have widgets for Blockbuster On Demand, Amazon On Demand, YouTube, Twitter, Flickr, eBay, USA Today, RallyCast and Yahoo!’s Finance, Weather, Video and News Updates — but not for Facebook, or e-mail services.
If they do catch on, however, IETVs could be a “nightmare” for the hardware “middlemen” who sell devices that enable users to connect their TV sets to the Web, such as set-top boxes like Apple TV and Roku’s Netflix player. IETVs could also threaten other online-viewing services, such as Time Warner/Comcast’s “TV Everywhere/On Demand Online,” which enables cable TV subscribers to access cable programming online for free.
At the same time, IETVs could be a “dream” for developers of “widgets” and similar software programs. Likewise, as iSuppli noted in its research report, IETVs could boost sales for manufacturers and semiconductor suppliers that provide memory, micro-processing chips and other products that enable TVs to connect to the Web.
And there will likely be more opportunities in the future, as TV sets become more affordable and other players in the digital media value chain find a way to exploit the trend. As Michael Greeson, President of consultancy firm Diffusion Group, tells BusinessWeek: "The concept has been validated in the mobile space; the iPhone is a proxy for what can happen in widget-enabled TV," he says. "This is a battle. Internet connection to the TV will redefine the entire television business."
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.
The industry is abuzz with reports that NBC Universal (NBCU) will likely be spun off by its parent company, General Electric (GE), once French conglomerate Vivendi sells its 20 percent stake in NBCU back to GE. Who could be the potential buyer, under this scenario? Comcast. According to publications like MarketWatch, the company is considering contributing its cable assets, along with up to $6 billion in cash, to purchase a 51 percent stake in NBCU. While no official announcements have been made, industry analysts are already anticipating the possible consequences of such a merger. For example:
Comcast boosts its content library. The move would significantly expand Comcast’s entertainment portfolio and Web reach, placing it among the top industry players, says ZDNet. Through NBCU, Comcast would gain network TV assets like NBC and Telemundo; cable content such as CNBC, A&E, Bravo, USA Network; global properties such as The Weather Channel; various Universal Studios assets; Internet sites such as MSNBC.com, iVillage and a partial ownership in Hulu.com; and more.
Comcast gains better online leverage. Comcast would also gain more control in deciding how and when TV shows and movies are distributed online, and at what price to consumers, says the LA Times. As more people stream videos online for free [see our previous post on online streaming], cable companies are pressured to step up their game to maintain viewership. Comcast and Time Warner, for example, recently launched a “TV Everywhere” service that allows consumers to watch shows online — provided they are paying cable subscribers.
"This deal (Comcast-NBC) has major implications on the success of TV Everywhere," Thomas Eagan, an analyst at financial advisory group Collins Stewart, tells the LA Times. "Comcast may decide to change Hulu to some degree to facilitate a premium Hulu service much faster." Hulu, now the number two online video site, according to market research firm comScore, is jointly owned by NBCU, News Corp and Walt Disney Co.
Comcast could shorten DVD release “window.” According to studio executives and media analysts, Comcast could try to reverse the current movie release sequence by offering movies through its paid On Demand service ahead of their DVD release date. "It's a potential game changer that could completely upset the traditional windowing position of the studios, if Comcast were to decide to get very aggressive in releasing new movies and TV shows in a variety of ways," Tom Adams, founder of financial and market research firm Adams Media Research, tells Reuters. Such a move, however, is likely to meet opposition from theater owners whose box office revenues could be threatened by a shortened “window,” reports Reuters.
Whether or not Comcast strikes a deal to buy NBCU, however, some analysts believe spinning off NBCU may be a good move for GE. "Selling NBCU will increase management focus on the core infrastructure businesses and that is a good thing," Steven Winoker, analyst for investment research and asset management firm Sanford C. Bernstein, wrote to clients. "GE has long suffered from too much complexity and faced significant investor pressure to part with its media and entertainment assets."
Unplug your TV set, cancel your cable, and throw out your remote control, because television as we know it is gone – at least that’s what everyone seems to be telling us. But is traditional TV really a technological dinosaur pathetically competing against a sophisticated and nimble online television model? We’ll attempt to debunk many of the myths and mistaken ideas.
