A New York Times piece this week posed the question of whether or not a US home can live without traditional pay TV, and came down painfully on the fence, concluding that perhaps it can, but not yet. It also concluded two other things, that there is no evidence that cutting the cord will happen at all, despite the availability suddenly of Over The Top (OTT) services and that if the cable companies would offer channels ‘a la carte’ that is and people could just buy the channels they wanted, then it could stop the OTT revolution in its tracks. Something irked us about that. Actually, quite a lot.
If Apple or Google offers a complete OTT TV system, anything with Apple’s usual imagination or Google’s tendency to do things for free, will impress every iPhone or Android customer in the US. Potentially, depending on when it takes off exactly, that’s 50 to 60 million people out of a population of 300 million ‘ or 20%. And rising.
They might improve this enormously, by making the offering available on phones, tablets and set tops ‘ areas where both may soon have offerings, and also by using their existing platforms to advertise the existence of the offering, and also by ensuring that one device could talk to the other in a privileged fashion ‘ phone or tablet to set top.
Do we think that the iPhone and iPod and every Google application, including search and mobile search, would miss an opportunity to remind individuals that they can try a new OTT service for nothing or next to nothing.
There is also the matter of the enormous ‘pent up animosity’ that US citizens have for their pay TV providers. The two DTH satellite providers do okay in customer satisfaction. A few of the smaller cablecos have a similar reputation, but Comcast and Time Warner Cable have too long exercised the idea that TV has inelastic demand (that means demand does not change with pricing, like cigarettes). Year on year they have heaped above inflation increases on unchanged TV offerings, as the content companies have heaped above inflation increases on these companies for carrying the same content. They have done this alongside poor customer service. The consumer has taken it all in the wallet and that has built up resentment. The fact that US customers have tried to get by without their $75 to $200 TV subscriptions, which was evidenced in the New York Times piece, shows how much they resent it. The fact that most people cannot find a good enough substitute is what leads to the conclusion that no-one can desert cable ‘ yet. But it shows they are looking.
What this has already led to is that no-one new is developing the habit of buying pay TV in the US. Students emerge into adulthood having spent the last 7 or 8 years ripping off content, downloading it, stealing it. They use file sharing sites and then buy DVDs of any films they really like. The rest of the time they make do with online video, starting with YouTube and migrating to any new trend which offers longer duration content. Many college kids have only a PC, not a TV, and find OTT viewing a natural extension to what they experience in college.
What has not happened yet is that no single OTT company has had a five year run at this, and that has to happen. There will be many companies in the OTT race, and they will get investment. Why? Because they have the opportunity to stake a claim on something like $60 billion in pay TV subscription revenues in the US alone. Whether that is a company like Apple or Google or a minnow like Roku or Sezmi, that journey will slowly teach them how to make the best out of selling to the US consumer.
Once they find formulas which work, then slowly, in the same way that Neflix grew in online and online DVDs, such a company will begin to scale, and then it will develop the financial muscle to buy in better and better content. Will it be free to internet OTT? Or will it be OTT Pay TV? Well Hulu Plus is out of the bag, and that’s pay TV, while the original Hulu is free to internet.
We think that in the end it is OTT Pay TV that really changes TV, and that this may well get off the ground first in the US, although that isn’t obvious. The US has the highest penetration, around 80% of homes with Pay TV. In Europe the closest countries are around 50% and with the exception of Japan, there are no other countries which are close.
When OTT Pay TV emerges in Europe, it will be thought of as just another way of getting pay TV, for those homes that don’t already have it. In the US, it has to actually supplant an existing contract, albeit one with a brand that has attached to it the idea that it has exploited US consumers.
All of which raises questions about the first conclusions in the New York Times piece ‘ no it won’t happen yet, at least not in high numbers, but we would say that it will begin happening soon. We also think that there is plenty of evidence, that people are prepared to do this.
One survey from US researcher Trender came out in 2009 which said that 7% of US homes will dump pay TV for some form of hybrid viewing option based around OTT services by 2012. It said that the big trigger would come when OTT services share in live sport distribution.
But the most curious thought, perhaps, of the entire piece was that cable companies could and might consider shifting to ‘a la carte’ pricing. This would cause a bigger upheaval in US pay TV than the arrival of OTT.
We know that cable and content businesses have always resisted a la carte ‘ the ability to create a cable subscription based on picking and choosing the TV channels you want delivered. This is because of the way big content has worked in the US and everywhere else.
There are US TV channels with good content and there are US TV channels with less good content. Cable companies only get the good stuff, at the right price as long as they agree to bundle the less good stuff. It’s the same with movie distribution ‘ Cinemas only get the top films, if they agree to take the lower grossing films. It’s the same with content everywhere though no distributors would admit it.
The creation of more and more TV channels creates more and more advertising inventory of varying value. That value is dictated by what attracts high audiences and what doesn’t. When people are watching rubbish programming late at night, they are not truly engaged, which makes them less responsive to advertising. If a la carte came in, most of the channels which offer less engaging content would be dropped.
Advertising overall would be more effective because with a higher concentration of quality content, people would remain engaged through the advertising. But there would be so much less of it. Like content good advertising slots are often bundled with poor slots. This is the nature of a good deal. Like in the banking crash, Toxic Debt was bundled with prime mortgages, to make the entire bundle look attractive.
This bundling the good with the bad has created a $60 billion US TV advertising business. What would happen to that if half of the inventory disappeared over night as consumers chose to opt for smaller bundles or individual channels. Churn would go down, because consumers would be happier, but if the networks received less advertising revenues overall due to the poorer quality channels disappearing, they would charge pay TV operators ‘ cablecos, telcos and satcos ‘ more per channel per person, to make up for it.
This actually only works in an environment where the network is already paid for. It works in OTT, because internet provision has been paid for, but not in existing triple play oriented pay TV network companies such as US cable.
If there was less TV advertising inventory, then existing inventory would take an even larger premium, and any ad spend left over would fall out of TV, which currently takes around 42% of all global ad spend and the likely winner here is ‘ internet advertising, in particular OTT video services.
There would be a huge advertising correction as people pushing one or another type of ad campaign either did better or collapsed.
Our point is that the arrival of a la carte pricing in TV will not come voluntarily. Instead it will have to be forced on traditional TV by a new type of TV, and that might be OTT Pay TV.
The reason for the New York Times article being so out of kilter is because the Pay TV industry is telling the New York Times ‘It ain’t never gonna happen,’ when it asks about OTT TV.
Instead we see that lack of OTT uptake as the darkness before dawn. When it comes, it will be a major market disruption.