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 (s nflx) 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?
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.
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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