Free cannot replace pay
There has been a raft of articles recently about viewers cutting the cord on their high-cost, multichannel pay TV services. It appears that the recession, anger at high prices and new options are encouraging television viewers to re-examine how they receive television programming.
A late August SNL Kagan report said that the number of subscribers to cable, satellite and telecom TV services in the United States fell for the first time in the second quarter. According to the report, the U.S. multichannel TV market lost 216,000 customers last quarter, versus a gain of 378,000 a year ago. The total number of subscribers to cable, satellite and telecom video fell to 100.1 million. Cable suffered its worst quarterly video subscriber loss to date, plunging by 711,000 subscribers. Six of the eight MSOs reported having their worst quarterly video loss on record to date. DBS and telco managed to add 81,000 and 414,000 subscribers, respectively.
Said SNL Kagan analyst Mariam Rondei, “Although it is tempting to point to over-the-top video as a potential culprit, we believe economic factors such as low housing formation and a high unemployment rate contributed to subscriber declines in the second quarter. We are also seeing churn resulting from the broadcast digital transition, which boosted video uptake early last year, as many have abandoned their paid subscriptions once initial promotional contracts expired.”
Similar stories began appearing in early 2009. A February story from MSNBC contained a list of anecdotal comments from viewers who had “cut the cord” to cable/satellite. In cases where viewers responded to articles on this topic, most said that cost along with new delivery technologies were key in their decisions. Said Glenn Britt, chief executive of Time Warner Cable, “We are starting to see the beginning of cord cutting. People will choose not to buy subscription video if they can get the same stuff for free."
So, will Internet delivery replace cable, satellite and OTA? Not by a long shot.
Online video has exploded in the past two years. A record 33 billion online videos were viewed last December according to a February report from Comscore. That would seem to indicate that viewers are moving from the big screen to the computer screen. Here are several reasons why that’s not happening.
Let’s run some numbers. There are 105.2 million cable subscribers in the United States. According to Comscore, Americans watched 33 billion videos last December. That amounts to about 300 online videos viewed per TV household per month. That amounts to about five minutes per day, or less than 2 percent of a person’s daily viewing. A study by Bernstein Associates found that heavy viewers, those averaging five hours or more per day of TV, only engaged in two minutes of online daily viewing. While Hulu, Boxee and others may claim there is massive online viewing, the numbers say otherwise.
Free does not a business make. Cable MSOs and content owners are not going to give away for free, something for which they can charge. According to Bull Gurely, Benchmark Capital, yearly affiliate fees total about $32 billion. What network executive would jeopardize a virtually 100 percent gross margin business by giving the content away on any platform?
Why would Hulu, for example, which was delivering NBC and Fox program content, suddenly begin blocking access to free content from the Boxee platform? Gurely believes it was because Comcast told the two networks that if Hulu was allowed to distribute the networks’ content free, then so too should Comcast. I’ll bet that hint of multibillion-dollar threat caused severe heartburn in those network offices. Broadcast networks live and die by the affiliate fees paid by cable and satellite to the network and other content owners. Revenue from commercials is important too, but affiliate fees are about as close to “free money” as any network will get.
Americans love their big-screen television sets. Sure, you can watch HD content on your Power Mac, but how does that image compare to the same picture on a 50in screen? In addition to the small screen size, much of Internet-delivered video is heavily-compressed and highly buffered. Seldom will content be available in the 1080i/720p/60 images we’re accustomed to viewing. When it comes to couch potato viewing, nothing beats a large screen and lean-back experience.
Show me an Internet-based electronic program guide that will present all the programming options available. Today’s viewer wants to press the guide button and be able to scroll through the available channels. Perhaps Google TV or Apple’s iTV (if it’s ever released) may someday be able to replace a cable/satellite EPG, but so far it amounts to a promise and not delivery.
The recent World Cup set a new record for online and mobile viewing for sports — 8.2 million mobile views and 50.4 million Internet page views in only two days. However, through what kind of hoops does a viewer have to jump to watch other sporting events? Major professional and college leagues may offer some events online, but they are seldom free. And for large events like the Super Bowl, no way, no how — not without online PPV. Remember those billion-dollar affiliate fees.
The bottom line as far as OTA program delivery is that the free model is good, but only if you’re a viewer. Content owners have a $32 billion incentive to be sure content remains sufficiently locked away behind pay walls.
Don’t expect the Internet to replace OTA/cable/satellite delivery anytime soon. Technology will continue to offer new delivery and viewing solutions. However, without the cooperation of, and money paid to, content owners, even the fattest fiber in the world connected to your PC or TV will only dribble out video.
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