New research from Convergence Consulting Group suggests that the number of viewers who choose to go without pay TV subscriptions, relying on broadband video services instead, will continue to grow in 2011, but at a slower pace that than the market saw last year.
In its latest report, The Battle for the North American Couch Potato, the research firm estimated that a million households cancelled their pay TV subscriptions in 2010, choosing instead to get their content from Netflix, (s NFLX) Hulu and other online sources. That was an increase from the 550,000 households in 2008 and 2009. And while more viewers are expected to rely on broadband video services, the drop in 2011 is not expected to be quite as dramatic as last year. Convergence estimates that 2.07 million households will have moved to watching online video only from 2008 through 2011, which means that 520,000 are expected to cut the cord this year.
At the same time, the pay TV market is expected to pick up somewhat. According to Convergence, pay TV operators added 300,000 new households in 2010, but that is expected to grow to 630,000 households in 2011. At the same time, that increase still pales in comparison to previous years. In 2009, for instance, Convergence reported 1.8 million net adds by pay TV providers.
One reason that some viewers are moving to online video sources is that they are more economical than more traditional cable, satellite and IPTV services. The average pay TV subscription runs $74 a month, according to Convergence, compared with the $8 a month that Netflix and Hulu Plus subscriptions cost. Since the average pay TV subscribers watches about 240 hours of video, that accounts to about $0.31/hour of video watched. For Netflix viewers that watch just 30 hours of video a month, the cost per hour viewed is just $0.27 cents. For those that watch 40 hours of Netflix movies, the ratio is even lower, at $0.20 per hour viewed.
But there are indications that Netflix might not be able to keep up the same cost structure, due to increased licensing costs and deals with content partners that create longer windows before movies and TV shows become available on the streaming service. Viacom (s VIA) and Starz are creating long windows between the air dates of some of their shows and the time that those programs show up in Netflix’s streaming library. And Showtime (s CBS) will soon pull old seasons of shows like Dexter and Californication that are still in production.
Not just that, but free online video sites are faced with greater ad loads, which could turn some online viewers off. Convergence estimates that on average, online ad loads will increase to include at least half as many ads as run on TV. And like Netflix, Hulu and other network sites could see the amount of content available decrease, or the windows consumers have to wait increase.
Even today, broadcasters still make a very small percentage of their revenues from online ads. Convergence estimates that ads on full-length TV episodes online will account for just 3.1 percent of ad revenue. That’s up from 2.7 percent in 2010, but it’s still a tiny number. Until advertising online becomes a bigger business, or until Netflix or other online sites are able to spend more on licensing, the amount and quality of content available online might decline, which could reduce the desire of some users to cut the cord.