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Summary:

Total subscription dollars for video go down in an over-the-top video world, what with the increased popularity of services like Netflix Watch Instantly and Hulu Plus. With cord cutting on the rise, how do the entertainment and pay-TV industries make up the lost revenue?

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Imagine that four years from now we became a cord-cutting nation, and everyone drops his or her $100 cable subscription and subscribes to the dynamic duo of the over-the-top (OTT) world: Hulu Plus ($7.99) and Netflix Watch Instantly ($9.99).

Revenue-wise, such a world might look like this:

The red line represents what the (admittedly unrealistic) scenario would look like if OTT subscriptions worked their way up to 100 percent penetration of pay-TV households (around 100 million) by 2014. The end result would be a roughly $30 billion decrease in video subscription dollars, down from today’s $54 billion video services market in the U.S (as represented by the blue line).

What does the video industry do to make up for lower revenue in a world where fewer subscription dollars cascade down the video river?

Advertising

The most obvious way to make up lost subscription dollars in an OTT wold is advertising. Perhaps the best example of a company leading the charge here is Hulu, with its better targeted, more relevant advertising that drives up CPMs as consumer engagement (and resulting ad effectiveness) goes up.

But even in a world of hyper-targeted ads, it’s important to note the overall pie will likely still shrink, as fewer pay TV subscribers means fewer advertising dollars coming through the pay-TV channel.

Live Content

Perhaps the best defense against cord-cutting that pay-TV has is live content. The vast majority of big-ticket live sports and other content lives today on pay TV. The reason it’s so effective is that there’s a clear difference in consumers’ minds about the experience of watching a dramatic sports event or vote-driven reality TV show in real time (and as a community) vs. watching later on a DVR.

But while pay TV will continue to use live viewing as a competitive weapon, content owners can also monetize outside of the pay-TV channel through direct over-the-top live streaming, something Major League Baseball has shown is a viable strategy. The live-stream audience will continue to grow rapidly (reaching 323 million by 2014). Smart content owners will look to better engage consumers through both stream live content and the community aspects around live TV.

Overall, the video entertainment market is in significant flux, and while in many ways breaking the pay-TV stronghold on subscription dollars opens up new potential avenues, much of the freedom for the consumer will result in a market where content owners themselves will need to be much more creative in how they get returns on their assets. Check out my weekly update (subscription required) at GigaOM Pro this week where I explore more ways to make up for shrinking PayTV subscription dollars.

Image Source: flickr user John Vetterli

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  1. Somehow i get the feeling that if cord cutting is real and content is delivered over the net instead, the cable operators, who also are the ISPs will just charge more for internet service and the money will be split with the content providers. The consumer will end up paying the same price, or more, without the ability to dvr things and skip ads. Cord cutting may be real (it may not) and it may change the industry, but there’s an awfully good chance its not going to make the content any cheaper in the long run. you get what you pay for, and if the price is lower, you’re going to get less or worse content. the only thing that will change that is if the sports leagues financing is changed dramatically, which, I suspect, is the big driver for content costs.

    1. @MDB – you are right this is a multilayered conversation, and you could have a whole other conversation around things like metering/throttling and just raising prices for broadband, for example. This was mainly a thought exercise around what happens if there is just less overall video revenue subscription dollars flowing downriver. Clearly MSOs are not going to stand still and not employ their weapons they have at their disposal, not the least of which ownership of the broadband pipes.

      1. @MDB and @Michael, all good points to consider. However, keep in mind that MSOs need to be careful not to attract the attention of the US Dept of Justice. Unless the laws are changed, “restraint of trade” is an illegal practice.

      2. @David – good point – but at some point, I think there will be a valid argument to be made by carriers if they’re pipes are overwhelmed by streaming video traffic that they’d need to move to a tiered broadband services (essentially some level of metering), where heavy users pay a higher toll. That model is accepted in the mobile space where available bandwidth much more constrained. While I doubt they could entirely offset lost video revenues, it will certainly offset some of the losses.

  2. Paid TV Apps is one possibility.

    It’s true live events are unique but there is a big threat via P2P networks and illegal live streaming hosts.

    1. Paid TV apps could make up some of the lost revenue, but Netflix and Hulu are essentially pay-TV apps. There might be more, like say a MLB or NFL app where direct payment to the content owner is possible as well.

      Regarding P2P and illegal, I don’t think consumers use illegal streaming en masse – remember, the mass market just wants to watch TV and are willing to pay some money for the luxury, even if its comparably less relative to a traditional PayTV package.

  3. It’s simple, your ISP bill will be metered and be $100+. In order to support the mainstream adoption of streaming the ISP’s and the CDN’s will need major upgrades. Now with the paltry penetration of netflix on demand (maybe 1% of simultaneous users…) it’s using up about 20% of downstream bandwidth. If it’s 75% simultaneous usage (like TV) you’ll need orders of magnitude more downstream capacity.

    Someone has to pay for the infrastructure upgrades. if it’s not amortized over 2-3 products (cable TV and phone and ISP) it will be paid for by just the ISP charges.

    The real power of broadcasting is the marginal cost of the incremental viewer is essentially zero. That is not the case with streaming.

    1. No doubt we would see metered broadband – but there will be alot of pushback on metered and $100 (from consumers and the government).

      Realistically, there’s enough opportunity in broadcast (satellite, for example) to undercut and offer near-competitive pricing to that of OTT offerings, and on the broadband side we’ll see telcos like FiOS undercut pricing from MSOs. The main point of this post to explore how, in a world where lower video subscription fees (barring impacts on broadband fees) go down, what do content owners do?

  4. I don’t think the number quite track – I’m assuming to 100mm includes not just comcast & twc but includes regional mso’s as well. If that’s the case then we should add all potential OTT providers to the hulu/Netflix equation to balance it out (including MLB, etc). Also, keep in mind that cable is modeled around subscribing to only one, where as I subscribe to both hulu and Netflix AND still but content on occasion via amazon or iTunes.

  5. The 500 channel universe is no longer important. Cable’s most valuable weapon is On-Demand. Customers don’t need another box or a way to access the web. They should divert the bandwidth it takes to deliver 350 – 400 of those channels to– On-Demand.
    Doing so would beat Hulu, Netflix and other OTT providers to the punch.

  6. Pete Kleinschmidt Friday, November 19, 2010

    In the cord cutting debate everyone seems to assume that the “content” shown on broadcast and cable television will continue to have value. The assumption is that the only way cord cutting can occur, is if the Internet provides an alternative delivery method for all that content. I’m not so sure.

    Traditionally television has served two main purposes – to inform and to entertain. I would argue that television has already lost its value as an informational tool. I never turn to television for information. Watching newscasts, documentaries, etc is simply too time consuming and the information presented too shallow. With a few clicks the Internet provides me with a far richer picture in a fraction of the time.

    As a form of entertainment, television still has value to many people. However with the continuous increases in processing power and bandwidth it is likely there will soon be thousands of different applications competing to entertain us in other ways. Compared to these alternatives, my guess is that television will no longer be worth the time.

    From my point of view it has already happened. About two years ago we had the hardwood floors in our home refinished and moved all of the furnishings to the basement for about 10 days. When we moved the furniture back we rearranged everything and found we no longer had room for the television. We decided at the time we would make room for it somewhere else later. It is still sitting in the basement.

    My suspicion is that a significant percentage (of the admittedly small number) of people cutting the cord are doing so not because they have found a cheaper, OTT source of television content. They are cutting the cord because they have found alternative forms of entertainment.

    1. The main use case for most time spent watching TV by most Americans in companionship and background noise. The average household watches 8 hours and 21 minutes of TV per day. This is not active involvement, this is background noise.

      I did a post about it a while back.

      http://sisyph.us/technologymedia/2010/5/18/what-does-watch-tv-mean.html

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