For many years, streaming video didn’t threaten traditional TV: the files involved were extremely large, and they required significant bandwidth and network capacity. But the network has caught up, and the infrastructure needed to deliver long-form and live linear television content online to mass audiences is in place. Now that the streaming-video infrastructure (both landline and mobile) has matured, traditional TV distribution is at risk.
Digital OTT companies are gaining ground. Netflix, Hulu, Amazon Prime Video, and other Internet-based digital over-the-top (OTT) players have matured rapidly—and they’re stealing a meaningful share of business from traditional cable and satellite TV companies. We expect OTT to grow from approximately 10% of total US video industry value capture in 2014 to 20% by 2018, a percentage that represents more than $30 billion in revenues. With more than a hundred ad-free, subscription-based OTT services operating in the US, the race is on to win those dollars.
Ad-supported OTT business models are making big bets, too. The National Football League has agreed to a $10 million (approximately) deal with Twitter that enables the social media site to live-stream ten Thursday Night Football games. Although not large by TV industry standards, the deal illustrates the changing landscape with regard to how content reaches consumers. By experimenting with new media, technologies, and distribution models, companies are looking to expand digital engagement while circumventing traditional distribution partners.
Cord cutters and cord nevers are increasingly prevalent. US viewers spend more than four hours per day watching TV—with average monthly bills of $75. These prices, which have grown steadily since the early days of pay TV, have fed various contributors: content creators, networks, cable companies, satellite operators, and telcos. But US consumers are dropping pay TV (or not subscribing in the first place) in larger numbers than ever before. In the fourth quarter of 2015, 13.7 million US households had broadband but no pay TV service, up from 9.8 million in the first quarter of 2013. In addition, consumers are actively thinning the services they buy from multichannel-video-programming distributors (MVPDs). These changes are not solely a result of sensitivity to rising prices; rather, the price-to-value ratio has depreciated. The price of pay TV continues to climb, while inexpensive (or free) alternatives to pay TV have proliferated, tempting viewers to find better value elsewhere.
Broadcast-tier (extra-cost) and skinny-bundle offerings are creating tension between cable networks and MVPDs. In the latest round of distribution deals, many cable networks negotiated for higher rates in exchange for, among other things, lower penetration floors. As a result, where networks may previously have required MVPDs to distribute their content to 90% of all subscribers, the newer deals have lowered the floor to 75% or 80% in some cases. Consequently, MVPDs have gained the freedom to market a series of lower-priced, pared-down services to attract price-conscious consumers who can’t stomach payments of $75 plus per month for 200 channels. (See Exhibit 1.)
Skinny bundles (scaled-down selections of pay TV channels) are margin neutral for MVPDs, compared with the traditional expanded basic package, and already more than 15% of subscribers at one major US distributor have signed up for skinny bundles. This trend is creating friction between MVPDs and cable networks. Skinny bundles often exclude the priciest networks, and consumers have adopted them faster than the networks anticipated. For cable networks locked out of bundles, subscriber losses are neutralizing the higher rates they negotiated.
MVPDs have begun dropping top-tier cable networks. MVPDs are taking a calculated risk in dropping certain cable networks when those networks’ value as a source of subscriber acquisition and retention ceases to outweigh the cost of carrying them. This tactic affects not only low-performing, independent networks, but also marquee network groups. When two MVPDs recently dropped Viacom, for example, they suffered limited video subscriber losses, maintained broadband subscriber levels, and increased near-term earnings before interest, tax, depreciation, and amortization. This is a new dynamic in the industry, and one that creates significant tension between cable networks and MVPDs. Within the fixed cable bundle, economics and incentives aligned fully. If the cable company thrived, the entire spectrum of networks thrived along with it. But now MVPDs have an economic incentive to drop costly networks—and because of their concentration within the industry, they have the power to do so. In the US, four MVPDs control 80% of distribution, with a regional monopoly in broadband, whereas six cable networks share 70% of the market and five studios share approximately 65%.
“Digital MVPDs” are emerging. Cable, satellite, and telecom operators have long had an iron grip on the major networks and live programming, and they relegated streaming video to serving people who wanted to do catch-up viewing. This is changing, too. With the launch of Sling TV and PlayStation Vue, viewers have access to an array of online channels that can compete with traditional cable bundles by offering live, linear programming. The cable networks are eager to promote their programming on these new streaming services, which may pay higher rates (a typical new entrant premium) and fuel competition among distributors.