One ongoing raging debate within our ever evolving industry is the impact of Internet delivered video (OTT video) on the subscription video model. The debate is of great interest because both telcos and cable companies alike derive significant revenue from customers paying their monthly cable bill. Any threat to that ongoing revenue stream creates anxiety.
One extreme end of the argument suggests the subscription model is doomed, as more and more customers cut the cable cord in favor of cheaper (and sometimes free) online OTT video content. I’ll label the folks who fall in this camp, the ‘doomsdayers.’ The other extreme suggests OTT is a fallacy, or an unsustainable business model that the masses will never fully adopt. I’ll label this camp the ‘optimists.’
As in most cases, the truth lies somewhere in the middle. There are supporting arguments on both sides of the equation. Doomsdayers can point to several legitimate trends to support their argument, including:
- The seemingly never ending rise of programming and other costs which push cable bills higher and higher, causing consumers to question the value of their monthly video subscription bill (seriously, someone needs to save these programmers from themselves, but I digress). Consumers are literally being pushed to cheaper OTT options as a result, the doomsdayers argue
- The habits of the younger generation who appear to favor video consumption from non-traditional sources like YouTube and on non-traditional video devices like laptops and tablets. Just wait until they become the paying consumer, the doomsdayers argue.
Optimists counter those legitimate arguments with some of their own, including:
- While cable bills do continue to rise over time, it still represents a great value when compared to other entertainment wallet spend like, live events, the movie theater, live sports (one NFL game ticket can cover the entire cost of most monthly video packages), etc. And while there might be some cord cutting as a result of perceived value, you can’t draw firm conclusions about the future based on events that are happening during the Great Recession, optimists argue.
- OTT video options are still way too stratified and confusing for most people. Have you tried to navigate Google TV? Some people have compared it to landing a 747. Only a small slice of the overall population has any interest in figuring out OTT – most people still want to sit down, turn on the TV, and surf channels, the optimists argue. Try doing that on a Roku box.
For now, neither of these arguments really matter concerning the impact of OTT. What does matter? Hollywood. They continue to call the shots and are working feverishly to ensure their content cash cow does not lose weight.
Case in point, the darling of the day for OTT video – Netflix. Reuters offers great insight into how Hollywood intends to rein in Netflix, for fear that its success will fundamentally change the content distribution business model. “You can’t sell your product to one distributor for pennies on the dollar and then expect other distributors to pay you dollars for your product,” an anonymous executive with a traditional pay-TV provider tells Reuters. In other words, traditional pay-TV providers are beginning to balk at paying top dollar for content while upstarts like Netflix negotiate cheaper deals for OTT distribution. That balking has Hollywood on notice. The rubber is beginning to meet the road with OTT, and the video business model establishment is not just going to roll over and let OTT destroy their gravy train.
Another example – Google TV. Seems like the number of broadcasters and cable channels blocking their content from Google TV grows by the day. Netflix is now on the hunt to expand their content offerings beyond their core movie library. Hit primetime TV shows are next on the agenda, with Netflix apparently offering up to $100k per episode for streaming rights.
Could Netflix do to the video content business, what Apple did to the music business – fundamentally change it and gain huge control and negotiation power in the process? Not if Hollywood has anything to say about it, and they will make every effort to prevent it.
Now, some will argue it’s too late — the OTT genie is out of the bottle and there’s no putting it back. There could be some validity to that point of view. The video business model is changing, and as I suggested, where it ends up will be somewhere in the middle between the doomsdayers and the optimists. Whatever the outcome, pull up a seat, because that famous slogan, “lets get ready to rumble” couldn’t be more apropos for the short term.
15 thoughts on “Think OTT is Destined to Replace Subscription Video? Not Without a Big Fight”
Resistance is futile. As politicians like to say – the people have spoken.
What people? Where are the credible numbers that really count cord cutters?
The real question here is not will OTT replace subscription video. There will always be subscription video – Netflix has a subscription model. The real question is will OTT replace cable MSOs/IPTV/DBS. This is a content distribution question, not a business model one.
“You can’t sell your product to one distributor for pennies on the dollar and then expect other distributors to pay you dollars for your product,” Exactly!
It is an evolution as everyone has to migrate their revenue streams from one bucket to another, including program providers and cable or IPTV providers. The question is, how long does the migration take to significantly change the way video is delivered to the end user?
I believe your point is there's not a lot of market data out there on cord cutting. For the most part, that's true, but here's a little data – https://www.telecompetitor.com/cable-cord-cutting-…
We're seeing >40% of the peering bandwidth for rural ISPs being gobbled up by Netflix. Youtube showing similar numbers – OTT is still likely to grow with premium services being added as well. What's the solution? One would be a transparent edge cache.
The cable operators and the programmers they have interests in are very powerful and will delay the move as much as possible, but look what Itunes did to the recording industry. If consumers can't get content, when they want it, and on their own terms, they'll go find other content. Online content is quickly becoming a viable alternative. The DVR and TV Everywhere has helped cable but it won't be enough. The landline is still a great value (cheaper than a dinner out), but people are cutting the cord because they don't use it. Customers don't like paying for channels they don't watch. Customers will migrate to linear offerings with fewer channels and the more specialized content will move online more rapidly. The tough part is predicting how quickly this happens and I agree it will be somewhere between what the optimists and doomsdayers think. The linear offering might become such a small number of channels that many just buy an antenna and do their other viewing online. The big companies will be OK. Broadband rates will increase (measuered usage?) and they'll start charging the content providers for using their networks. This will help offset their loss of linear revenues.
Nice analysis Greg. Will be interesting to watch how your predictions play out, especially – "Broadband rates will increase (measuered usage?) and they'll start charging the content providers for using their networks. This will help offset their loss of linear revenues." That will make for many more blog posts and comments 🙂
..and you had to quote my mispelled "measuered"? LOL I think the operators will be OK, it's the programmers that are truly threatened by all the new "content" providers. Unfortunately for consumers, the operators and programmers are too often the same company. Programmers are now competing with kids uploading Youtube videos with pretty cheap overheads. LOL They used to being able to have some control over what you watch. The Internet has changed the game and as bandwidth to the home increases, it will make even more services possible. Can't blame them for holding on as long as possible. Good business on their part.
Will channel surfing ever go away? and if not, who will deliver the streaming video that will allow the channel surfing? thoughts?
JPS – great point. Something very practical – channel surfing – which gets lost in this debate. At present OTT can't replicate that very important experience, which in my opinion will limit its appeal. OTT requires a number of paradigm shifts, channel surfing being one, and maybe one of the most important ones. Maybe the technology already exists, or will be here soon, but I haven't heard of nor seen anything that addresses this important issue.
My family hasn't channel surfed since we got our first satellite with an on-screen program guide. We search through the guide but don't change the channel until we find something we want to watch. Trading random surfing for actually being able to find what was on was a very easy transition for us. Channel surfing 200 channels is a very painful experience. Are there really people that still surf? Are there those that surf even when they have a program guide? The only time I surf is in a hotel room where I don't have a guide.
Good points Greg. I guess it depends on how you define surfing. I define it as you suggest. Looking at a program guide and changing the channel – frequently in my case. The on-screen program guide just makes my surfing much more efficient. I may change channels six or seven times in a 15 min setting, jumping between ESPN and the news and other shows, especially during commercials. To me – that's channel surfing.
From what I've seen with OTT options thus far, there's no equivalent experience. Of course, I'm just an old fuddy duddy now. Maybe its antiquated behavior.
Channel surfing as we once knew it doesn't really exist with 200 digital channels. I guess I would describe it more as using the "jump" button to go between your Sunday NFL games, Saturday College Sports, etc… Maybe we will just learn not to do that, and keep our focus on one thing at a time! If it is like my OTT service now, (Netflix, Vudu, CinemaNow, etc…you would never migrate back and forth, as it takes too long to load. I am sure technically it will get there, such as an ESPN streaming two or three games at a time, just in another window so you could swap between. I don't think we will need to wait long to see!