From pay TV to OTT and streaming, who will own the television of tomorrow?
A few weeks ago we examined how social networks are disrupting the way we consume digital media. From live events to news and games, once-social platforms are preparing to become consumers’ one-stop shop for all things communication, headlines and video sharing.
One topic we have not explored, however, is the market for network television. While Netflix, Amazon and other new streaming services often come to mind, the historic actors – the giants of cable, telecommunications and media – still have a strong hold on the TV market.
There is no doubt that television is moving to the Internet. Cable TV viewing was down 12.7% year-on-year in January according to Nomura Research, one of the biggest losses since they began studying the market. While cable-based pay TV still represents a large portion of programming watched, more and more consumers – especially the young – tune in online and on mobile devices. Today, traditional television is facing pressure from the famed cord-cutters, while media giants compete with OTT and streaming-only actors.
Let’s look at a few of the trends shaping the network TV landscape today, and how these players are preparing their own futures and the future of television.
Redefining the bundle, licensing and distribution
Today consumers are demanding more choice at a lower cost when it comes to TV bundles. The Internet has offered greater possibility for consumers to customize packages according to their tastes and avoid paying for content they don’t want.
Pay TV is following suit, to an extent. However, this change is disrupting a longstanding – and lucrative – distribution model. Verizon set off a wave of opposition a few weeks ago when it announced that Fios would offer a slimmed-down TV bundle that cut ESPN out of the basic package. ESPN sued to stop the maneuver, claiming that it violated affiliate contracts. Fox and Disney have not joined in for the time being, but have refused to air ads for the new Verizon service in certain markets.
Affiliate contracts, which set the fees distributors pay for licensed content, are media companies’ lifeblood – a means of setting prices and keeping a firm grip on cable companies and ISPs. Unbundling represents a serious threat to this revenue stream. At the same time, bucking the trend will be increasingly difficult as customers demand choice and benefit from more options of where to get their content.
Verizon Fios is growing (+10.2% to 5.7 million subscribers in Q1 2015) and is taking its lead from consumers when it decided to slim down its offering. But not without a fight. The Verizon and ESPN dispute aptly demonstrates the power play at work between content owners and distributors in a market demanding concessions from both sides.
Consolidation in already consolidated industries
These days deals between TV companies and content distributors are a daily headline. The need to reconcile licensing fees, consumer preferences, and an increasing number of offers via both cable and broadband leads many giants to wed off. Horizontal and vertical mergers are common in what has become a tangled web of alliances.
Comcast – the US’s #1 cable and broadband provider – may have dropped its $45 billion bid for Time Warner Cable Inc. – the #2 cable and broadband provider – after authorities looked at it askance. Yet days later it was announced that the proposed $48-billion deal between the #2 wireless carrier and #1 satellite-TV provider, AT&T and DirecTV, would finally go through.
Attempts to control the value chain have long born their fruits, particularly those aiming to keep a tight grip on the cable and Internet market. Today distribution is so consolidated that many Americans have the choice between only two ISPs; 30% have no choice at all, and this number is growing.
Meanwhile, acquisitions also provide a means for ISPs and cable providers to rebalance the competitive environment in their favor. Media companies have long held an advantage over distributors, largely due to retransmission rights, while carriers bore the fees and consumer backlash on price hikes. Often, buying up other companies is a good way to reshuffle the cards.
Such manoeuvres have increasingly focused on diversifying their offerings to include over-the-top capabilities. Just a few days ago, Verizon bought AOL for $4.4 billion to shore up its mobile video, advertising and content offering with brands such as Adap.tv. Last Thursday, AT&T penned a deal with Hulu to give its subscribers access to the widely popular streaming service on their mobile devices through the AT&T app. (It might also be worth mentioning that Hulu is owned by News Corp. (Fox), Comcast (NBC Universal), and Disney (ABC)).
The list goes on: SlingTV is the brainchild of Disney and Dish; Netflix partners with a variety of large media companies; and as Concurrent Media aptly summed up concerning the recent Comcast bid: “For all its claims of consumer benefits that would have flowed from being allowed to merge with TWC, Comcast’s main goal in pursuing the acquisition was to gain scale and leverage for the negotiations to come over the terms of over-the-top distribution.”
Whether media/distributor, cable/broadband, or media/OTT, these pairings are carefully calculated to keep control in the hands of those who have long reigned over the landscape, whatever form delivery may take.
Room for growth in digital offerings
As deals multiply and the transition from cable to broadband continues, hybrid and complementary pay TV and OTT offerings will become increasingly common. Compared to cable offerings, digital channels today remain fragmented. Aggregating platforms like Netflix and Amazon or direct sites such as CBS All Access and HBO Now allow consumers to choose; however, they often have a relatively small portion of the content users wish to access. Media and entertainment giants have the advantage of being able to compose more varied offerings in a one-stop shop.
In a move to embrace over-the-top, many cable companies are building their own “cord-cutter” OTT products. Cablevision will be the first pay TV provider to distribute Hulu and HBO Now. On the hardware side, Comcast is developing a Web-enabled set-top box. Verizon is also set to launch a stand-alone OTT video product this year. While the move may seem risky for their own pay TV offerings, these companies are betting on new routes win over young viewers, using the long-term transition to OTT to offset any negative effects new products may have on their current cable products.
Content owners are exploring new distribution channels as well, both through proprietary platforms and partnerships. HBO’s new stand-alone streaming service HBO Now launched just in time for the new season of Game of Thrones. Disney is also rumored to be working on a stand-alone branded OTT offering. ESPN meanwhile has made some of its content available online as an add-on feature to Sling TV, and recently struck deals with social networks for the rights to certain sports highlights.
Jockeying for leadership in the OTT market
The march towards OTT is underway. The stakes are high and the atmosphere complex. Just a few days ago, the nation’s largest cable company crossed a major threshold: the number of Comcast broadband subscribers surpassed the number of Comcast cable subscribers. This marks a historic shift in habits that is forcing ISPs and media companies to rethink their businesses.
So what do we have to look forward to in upcoming episodes?
Consumers have made it clear that they want unlimited content, 24/7, on every device, without being tied to one product or offering. Those who can provide a seamless experience from cable and IPTV to OTT will have a leg up. Watch out for newcomers to original content production, acquisitions of media companies, price duals and undercutting traditional bundles as companies battle to find the best business model. Showdowns over licensing, advertising, downloads and in-app purchases are all in store.
Infrastructure needs content and content needs infrastructure. Bandwidth will be of upmost concern as OTT, mobile and 4K-enabled devices multiply. Distributing high quality video over the Internet will require more and more heavy investments in infrastructure, for which well-entrenched cable and broadband providers like Comcast and Verizon will have an edge – and perhaps even the final word. In a sort of Faustian bargain, Netflix has signed performance agreements for direct access through Verizon and Comcast networks; it will surely not be the last to sign this kind of deal.
And a healthy dose of drama…
As the tables turn, new dynamics and increasing tensions between content producers and distributors will make for plenty of intrigue, plot twists and perhaps some odd bedfellows.
Who will emerge victorious?
Is the consumer bound to see expensive cable replaced by expensive broadband? Where is net neutrality in all of this? Will DIY live-capture tools like Periscope become a thorn in the side of content producers? How will piracy affect TV pricing and offerings? How will these companies cope with exponential increases in video traffic and bandwidth demand?
The future of TV: grab a seat, the show’s about to begin.